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Business law Business law Document Transcript

  • Business Law Chapter VI BUSINESS LAWA. COMPANY LAWIntroduction Since the implementation of the 25-year economicdevelopment-planning program, Indonesian economic growth canbe attributed to an increase in participation of small and largebusiness enterprises. Not only has there been an increase in assetsand capital accumulation, enlistment of human resources, but alsobusiness resources (which from time to time create a businesscycle). One of the business entities that dominate, in the Indonesianbusiness sector, is the Limited Liability Company. As a createdlegal entity, it is necessary for an Indonesian Limited LiabilityCompany to be supported not only by its own organs, but also byclear and concise regulations in order to maximize and utilize itsorganizational and managerial ability effectively and efficiently.Hence, strong and stable business entities are very important toenhance national development. It is therefore necessary to have abrief overview of business organizations within the framework ofIndonesian Company Law.Indonesian Legal System 135
  • Business LawTypes of Business Organizations Indonesia’s commercial sector recognizes three principalcategories of business organizations: sole proprietorship,partnership (general or limited) and company. Sole proprietorship isgenerally used in the informal sector, since its nature and activitiesare of the informal sector. For example, it does not require formalregistration to Indonesian authorities. There are three types of partnership: persekutuan perdata(maatschap or private association), persekutuan firma (venootschaponder firma or firma, “FA”) and persekutuan komanditer(commanditaire vennootschap, “CV”). The Indonesian Civil Codegoverns the first type of partnership whereas the rest are governedby both the Indonesian Civil Code and the Indonesian CommercialCode. It is not easy to determine absolute equivalents between thesepartnerships and partnerships under common law tradition;however, the maatschap and firma closely resemble the concept ofa general partnership under the common law system whereas thecommanditaire venootschap resembles limited partnership undercommon law. The last type of business organization is under theIndonesian Company Law takes the form of Perseroan Terbatas(“PT”). It is similar to the incorporated limited liability companyunder the common law system. Historically, this was referred to asthe Dutch corporate model known as the naamloze venootschap(“NV”). However, since the enactment of the new IndonesianCompany Law, which repealed the provisions governing thecompany, many companies started to use the abbreviation “PT”.There was also another form of an Indonesian incorporatedcompany, which was intended to be used by indigenousIndonesians, so-called “the Maskapai Andil Indonesia”(Indonesische Maatschappij of Aandelen or IMA). It wasgoverned by separate regulations, i.e. Ordinances 886. However,the promulgation of the new Indonesian company law in 1995abolished the dualism of the Indonesian company structure - PT136 Indonesian Legal System
  • Business Lawunder the Commercial Code and PT under IMA, and brought theIndonesian company structure into one common corporate regime:the (New) Indonesian Company Law. Until now, there are three types of companies in Indonesia.The most common is “PT Biasa” or local companies. Even though itonly has Indonesian shareholders, directors and commissioners, it isstill subject to regulation by the UUPT. It is required to have aminimal capital, as stated in the UUPT. Although GovernmentRegulation No.20 of 1994 (“PP20”) states that foreigners mayacquire shares in this type of company, in practice, it is closed toforeign investment and foreign citizens are not allowed to holdpositions of director or commissioner, unless the field of business isnot listed on a negative list, in which a specific written approvalfrom the relevant Minister is given. The second type is a domesticinvestment company referred to as “PT PMDN” (PMDN Company),which has certain regulatory advantages and tax concessionscompared to a PT Biasa. Originally, a PT PMDN company wasreserved to Indonesian shareholders, but following the enactment ofPP20, the Decree of Chairman of BKPM (Investment CoordinatingBoard) 15/SK/1994 (“SK15”) and the current practice of BKPM, itbecame possible for foreign parties to acquire up to 95% of theshares in the company. Such a company with a foreign shareholdermay have foreign directors and/or commissioners. To obtain statusas a PMDN company, the company has to have BKPM approval forthe line of business it is operating as and is required to have aminimum investment equivalent to the exchange rate as stated inBKPM’s letter of approval (specifically in rupiah) set by BKPM.Finally, there is the foreign investment company incorporated in theForeign Investment Law of 1967 Law No. 1 of 1967 also known asthe “PT PMA” (PMA Company). It may have foreigners as itsshareholders so long as it has at least two shareholders, but it has anobligation to invest an unspecific percentage to Indonesia within 15years. It may have foreigners as director and commissioner, enjoycertain advantages and protections against expropriation of theIndonesian Legal System 137
  • Business Lawinvestment. However, it has an obligation to report its activitiesregularly to BKPM. BKPM will approve the minimum investmentplan of this company that is specified in both US dollars and rupiah. .The (New) Company Law Framework Ever since Indonesia’s independence, business sectors andmainly business enterprises have played an important role infostering Indonesia’s economic growth. There are variousregulations that govern Indonesian business organizations.Presently, the laws of Indonesian business organizations areprimarily governed by the Law on Limited Liability Company, LawNo.1 of 1995 (Undang-Undang tentang Perseroan Terbatas or“UUPT”) which is considered modern Indonesian company law(referred also as the New Indonesian Company Law), theIndonesian Civil Code (Kitab Undang-Undang Hukum Perdata orBurgelijke Wetboek), and the Indonesian Commercial Code (KitabUndang-Undang Hukum Dagang or Wetboek van Koophandel).The last two codes were first promulgated during the Dutch colonialrule. The UUPT, consist of 129 articles and was enacted onMarch 7, 1995 and came into effect a year later. Prior to theenactment of UUPT the limited liability company was governed byonly twenty-one articles in the Indonesian Commercial Code. TheUUPT symbolizes the first major revision of the Indonesiancompany law since the commercial code. The promulgation of thelaw was a response to the rapid economic progress that neededprovisions to complement international practices and the moderncommercial sector. This paper will focus on the UUPT since itserves as the basis of Indonesian corporate structures.138 Indonesian Legal System
  • Business LawSeparate Legal Entity PT, as an Indonesian company, is a legal person who has alegal identity separate from its shareholders. Thus, shareholders arenot personally liable for the obligations of the company. Theshareholders have limited liability to the extent that their liabilityfor the acts of the company can be limited to their capitalcontribution. Nevertheless, there are some limited possibilities topierce this corporate veil, for instances in the event that the relevantshareholders either directly or indirectly with bad faith takeadvantage of the company solely for their personal interest or therelevant shareholders either directly or indirectly unlawfully usecompany’s asset causing the company’s assets to be inadequate tosettle company’s debts.Incorporation There are four steps for incorporating a PT. First, executethe deed of establishment, which also includes the company’sarticle of association before a notary in the form of a notarial deed.Second, obtain a formal approval over the deed from the Ministry ofLaw and Regulation. Upon approval, the deed has to be registeredin the Company Registry that is maintained by the Ministry ofIndustry and Trade. Lastly, publish the deed of establishment in theState Gazette. It needs to be pointed out that prior to the registrationand publication processes, the liability of a company can be put inthe hands of its directors. In other words, in addition to the liabilityof the company, a personal liability of the director’s may arise if thenew company fails to register and publish the approved deed. Another requirement in establishing a PT is to have at leasttwo persons as the founders or shareholders. The eligible person canbe an individual or a legal entity. With an exception for PT BUMN(State-Owned Company) can be established by a single entity, thegovernment. The requirement to have at least two shareholders stillcontinues. If a PT has only one shareholder and it does not offerIndonesian Legal System 139
  • Business Lawshares to other shareholders within six months, then the existingshareholder is personally liable for the agreements and losses of thecompany. The requirement to have at least two shareholders isbased on contractual theory, a conception that a PT is a product ofcontract, thus it requires two or more shareholders at all times.Share Capital and Voting Rights The UUPT requires a company to have a minimumauthorized capital of 20 million rupiah. Issued capital must be atleast 25% of the authorized capital and by the time of approval ofthe Articles of Association of the new company by the Minister ofLaw and Regulation, all the issued capital must be fully paid up.However, in the case of a PMA company and a PMDN company,usually BKPM requires a higher minimum capital level ofinvestment. A company may issue registered and bearer shares and mayalso issue non-voting shares. Furthermore, it can issue redeemableand convertible shares, cumulative and non-cumulative shares, andpreference shares. However, a company must have at least one classof ordinary shares (“saham biasa”) with voting rights. Payment forshares can be made in cash or in other forms (“in kind”), butpayment in kind, such as of real property in consideration for theissue of shares, requires an independent expert valuation. Under theUUPT, a company may not issue shares to itself or to its subsidiary.Subsidiary is defined as a company in which the parent companyowns more than 50% of its shares or the parent company controlsmore than 50% of the voting rights in a General Meeting ofShareholder (“GMS”), and/or the parent company influencesmanagement control such as the appointment and dismissal ofdirector and commissioner. However, under special circumstances,it can buy back the issued shares and hold them as ‘treasury shares’that the company can sell at a later date. Such shares cannot be140 Indonesian Legal System
  • Business Lawcounted to form a quorum nor can the voting rights be attached tothe shares being exercised.Directors, Commissioners & Shareholders Meeting Indonesian corporate structure is different from thecommon law system, since it adopts a two-tier managementstructure instead of a single-tier management. The managementstructure comprises of Board of Directors (“BOD- Direksi”) andBoard of Commisioners (“BOC-Dewan Komisaris”). Seniorofficers are responsible for the company’s actual management in theoperational sense is the Direksi. Even though there is one director,there is usually more than one. The basic functions of the Direksiare to manage and represent the company, and not the shareholders.The second tier is Komisaris (“Commisioner”), which has the roleof supervising and advising the Direksi, and representing theinterests of the company and not merely the interest of theshareholders. The requirement of a company to have a BOC is asignificant alteration from the old provision (the Code). To date, allpublic companies, companies in the business of mobilizing fundsfrom the public or companies that issue debt instruments must haveat least two directors and two commissioners. The UUPT alsodistinguishes between the collegial nature of the BOD and the non-collegial nature of the BOC. Where a company has more than onecommissioner, the BOC constitutes a council pursuant to theElucidation that no individual commissioner can represent thecompany if there is more than one commissioner. In contrast, whena company has more than one director, each director has theindividual authority to represent the company unless the company’sarticles of association states otherwise. Although the primaryresponsibility of managing the company rests on the directors, insome circumstances, commissioners can exert certain managerialpowers -provided by the company’s articles of association or theGMS- for instance managing the company for a specific timeperiod. Both director and commissioner bear personal liability forIndonesian Legal System 141
  • Business Lawany fault or negligence committed in discharging his/her task.Although the UUPT does not define “fault” or “negligence”, it doeshowever acknowledge the concepts of fiduciary duties. In case ofbreaching any fiduciary duties, shareholders who control at least tenpercent of the issued shares with valid voting rights may, in thename of the company, bring a cause of action against the director orcommissioner for the loss suffered by the company. Since theshareholder initiates the legal action in the name of the company, itcan be considered derivative action. Pursuant to the UUPT, the shareholders of an Indonesiancompany are acting via GMS. The GMS has various rights, some ofwhich cannot be waived under any circumstances i.e. the right toapprove amendments of the company’s Articles of Association andto approve a dissolution or winding up of the company, while therest may be modified in the company’s Articles of Association.There are two types of GMS: annual and extraordinary meetings.An annual GMS is held within the last six months of the company’sfiscal year. The GMS convenes in order to approve the annualreport, including its annual accounts that must comply withIndonesian Financial Accounting Standards and the signatures ofthe directors and commissioners required for the annual accounts.The extraordinary GMS can be convened at any time that thecompany deems necessary for the purposes stipulated in the UUPTor Articles of Association. In other word, a company shallundertake an extraordinary GMS for the purposes other thanapproving the company’s annual account, such as: merges,acquisitions or appointment of a new Direksi. Commissioner,Director or a party that controls at least 10% of the issued sharesmay request the meeting.Minority Shareholders protection The UUPT grants minority shareholder a great deal ofprotections as all shareholders have pre-emptive rights – a right142 Indonesian Legal System
  • Business Lawallowing them to maintain or increase their proportionate shares inthe company before the company offers the shares to other parties.Another right comes from the provision that entitles the shareholderto control less than 10% of the issued shares with valid voting rightsto request the State Court to commence an investigation panel withrespect to the company in the event that the directors orcommissioners are suspected of having committed an illegal act thatcauses loss to the shareholders, third parties or the company itself.Mergers & Acquisitions Although the UUPT provides only eight articles governingmerges and acquisitions, it is still a remarkable change inIndonesian corporate context because there have been no specificregulations on such business activities since Indonesia’sindependence. It is expected that a more detailed provision will beissued subsequently. It is important to note that even though theUUPT introduces three terms: merge, amalgamation andacquisition, it is actually governed only by a statutory merge andshares of acquisition. There are four types of merges: shares, assets,contractual and statutory merge; whereas in acquisition there areasset and shares acquisition The term merger (“penggabungan”) refers to a company thatbecomes part of another existing company. While amalgamation(“peleburan”) refers to a transaction in which two companiesdissolve in order to form a new company. The difference between amerge and an amalgamation is in a merge a company dissolvesanother, whereas in an amalgamation both companies involveddissolve in order to create a new company. Acquisition(“pengambilalihan”) refers to a company or individual taking over acompany through a purchase of the latter’s shares. In this process,no company dissolves. A company involved in a merger,amalgamation or acquisition in general has to take two steps. First,the directors of the respective company prepare a proposal. TheIndonesian Legal System 143
  • Business Lawproposal must then be approved by the extraordinary GMS, whichmust satisfy the quorum and approval requirements. Shareholdersrepresenting no less than 75% of the issued shares with votingrights must attend the meeting, and approval must be given by 75%of those attending shareholders. Second, submit an approvedproposal to the Minister of Law and Regulation for the purpose ofreporting or approving the proposal. The UUPT also requiresmerges, amalgamations, and acquisitions to take into account theinterests of the minority shareholders and employees of thecompanies as well as the interests of the public and of competition.The right of the minority shareholders to sell their shares for anequitable price should also be protected. With respect tocompetition, the Elucidation states that in the even of undertakingmerges, amalgamations and acquisitions, a company should preventthe rise of a monopoly which goes against public interest.Dissolution The UUPT recognizes three ways a company can dissolve:decision made during a GMS meeting, upon the expiration of theperiod of existence specified in its articles of association and byorder of court. The court order to wind up the company (judicialinvestigation) can also be made by request from the prosecutor forrepresenting the public’s interest or a single shareholder holding notless than 10% of the voting rights. Once the company is wound-up,it must appoint a liquidator to liquidate the company. The directorwill act as the liquidator in the event that no liquidator has beenappointed.Proposed Revisions Revisions are aimed at unclear and ambiguous provisionssuch as:144 Indonesian Legal System
  • Business Law• the filling systems (registration) articles of association and amendments to the articles of association at the Ministry of Law and Regulation and the Ministry of Industry and Trade, should be simplified because it is complicated, expensive and time consuming. Even though the filling system has been computerized since 2004, however, it is still ineffective.• the articles of association should specify only the amount of authorized capital not the amount of paid-up capital or issued capital• the issuance of a share without nominal value should be permitted• the meaning of ‘substantial part’ of a company’s assets should be clarified• the meaning of acquisition should be made clearly in regards to terms such as: changing control, etc.Conclusion The promulgation of the UUPT, at that time, reflects thepolitical will of the Indonesian government to reform the corporatelegal framework to be in sync with modern commercial activity,thus generating greater legal certainty in the Indonesian corporatesector. Even though some parts of the UUPT are merely codified,due to existing practice or government policy, problems are stillencountered. The enactment of the New Company Law marks amajor step in the development of the Indonesian Company Lawframework. The new provisions in the UUPT that govern mergesand acquisitions, duties and liabilities of directors andcommissioners, and the rights of minority shareholders raise thecorporate governance issues in Indonesia. At last, the UUPT can beconsidered a unique legislation product because it combines bothcivil and common law concepts. On the one hand, it preserves civillaw concepts, such as the two-tier management structure and theIndonesian Legal System 145
  • Business Lawcompany (judicial) investigation, while on the other hand it alsoadopts common law traditions, such as provisions that deal with theduties of directors and commissioners. Hopefully, the proposedrevisions of this UUPT will create a legal certainty for the future ofIndonesian corporate law.B. CONTRACT LAWIntroduction The Indonesian commercial legal system is, basically,derived from the Dutch Civil Law traditions codified in theIndonesian Civil Code (Burgelijke Wetboek or Kitab Undang-Undang Hukum Perdata) and the Indonesian Commercial Code(Wetboek van Koophandel or Kitab Undang-Undang HukumDagang). The first code, however, serves as the basic legislationgoverning Indonesian contract law. Contract, is actually a part ofwhat the Indonesian legal system recognizes as the law ofobligation (hukum perikatan or verbintenissen), and is governed inBook III of the Indonesian Civil Code (“ICC”). The law ofobligation recognizes two sources of an obligation; namely, anobligation resulting from contract and an obligation resulting fromstatute. Pursuant to Article 1313 of the ICC, a contract or anagreement is defined as an act by which one or more individualsbind to one another. The term of “contract law” is then used todefine an obligation that arises as a result of this contract and isreferred to as a contractual obligation. Therefore, contract lawconstitutes one of the principal sources of obligations in Indonesianlaw. There are several principles with respect to contract law thatare important to understanding the operation of Indonesian contractlaw. First, the principle of freedom of contract – a principle that146 Indonesian Legal System
  • Business Lawrecognizes that each and every person has the right to enter intocontract so long as it does not breach the prevailing laws andregulations, accepted decency and moral standards, and publicpolicy. Second, the consensual principle – in essence a contract initself implies a meeting of minds, and from the moment thismeeting occurs a contract is formed. Thus, the consensual principleis a principle stating that a contract is considered to come intoexistence once the parties reach a mutual consensus. These twoprinciples form the basis of Indonesian contract law. Otherprinciples are contained in Book III of the ICC where Indonesiancontract law is referred to as “an open system”. Generally, this hasbeen interpreted to mean that the provisions contained in Book IIIare considered as an optional law, in which the parties are free tomake use of or ignore those provisions. As optional law the partiesare permitted to determine specific provisions regulating thecontract into which they will enter including agreeing to provisionsthat are expressly contrary to the optional law contained in Book III.In the event that the parties opt for a standard contract and have notmade any specific provisions in the contract to the contrary then theprovisions of Book III apply – this is referred to as the “defaultrule”.Elements of Contract Not all contracts constitute valid and binding contracts. Toestablish a valid and binding contract, there are four conditions tobe satisfied as follows:Consent of the Parties The consent of the parties to enter into a contract constitutesthe consensual principle and serves as the basis of contract law. Acontract is considered to have consent if approval by the parties ismade without duress, mistake or fraud (misrepresentation). DuressIndonesian Legal System 147
  • Business Lawinvolves an illegal mental threat including physical violence (butnot an action that is permitted by law to bring as a lawsuit),blackmail and excessive influence over a person in a weakenedmental state. Mistakes comprise of two types: concerning theidentity of the subject matter of the contract and concerning theidentity of the person that concluded the contract. Fraud is definedas a plain act performed by one party prior to the formation of acontract with the intention to deceive the other party and induce himto conclude the contract that he would not have concluded if he wasto be aware of the deception. In other words, one party concludesthe contract because of the deceitful act. Nevertheless, a contract may be valid even though consentwas obtained by duress, mistake, or fraud. In this case, the contractis considered to be a voidable contract, meaning that the contractcan be made void but only at law and on the bringing of asuccessful cause of action by the injured party. The suit has to befiled within five years of the cessation of the duress or within fiveyears of the discovery of the mistake or fraud.Capacity of the Parties The legal capacity of a party to conclude the contract servesas the second important requirement that must be satisfied before acontract can be considered valid. Generally, all persons are legallyeligible to enter into contract. Exemption is made to the followingpersons: a minor (a person under 21 years old, unless married), aperson under official custody, and a person prohibited by therelevant law to conclude a contract. A contract concluded by the above persons is considered tobe a voidable contract. It is possible that a contract of this naturecan be annulled by the court on the request of the incompetent partythat entered into the contract. The obligation of the other party,however, is unaffected by the incompetence unless or until thecontract is declared void. The nullification of contract based upon148 Indonesian Legal System
  • Business Lawthe incompetence of the individual mentioned above, shall cause theassets and the parties to be returned to the state they were in prior tothe entry into the contract, on the understanding, that anythinggranted or paid to the incompetent party, as a result of the contract,may only be reclaimed, to the extent that any such payment that isstill in the hands of the incompetent party, or to the extent it appearsthat the settlement of payment has been beneficial to him, or that hehas applied or extended the enjoyment to his use.Definite/Specific Subject Matter Third element of a binding contract is the specific subjectmatter. In general, anything that is tradable and determinable maybecome an object of a contract. A subject matter of a contract canbe comprised of rights, services, or goods whether existing now orin the future. Under the ICC, only existing goods are tradable.Future trading is governed by a separate law. For instance, the saleof 10,000kg of jasmine tea leaves at harvest time in 2005 for USD2/kg is considered sufficient to constitute a definite subject matter,but the sale of jasmine tea leaves for USD2/kg, does not constituteas a definite subject matter, and thus it is unacceptable.An Admissible Cause The last pre-requisite that must be satisfied for a validcontract to be created is an admissible cause. An admissible causemeans that the purpose of a contract must have a lawful ‘causa’. Acontract is considered to have a lawful causa or admissible cause ifthe object of the purpose of the contract breaches the existing lawsand regulations, accepted decency and good moral standards, andpublic policy. For instance, a contract regarding the trafficking inhumans would be considered to be an illegitimate contract as thepurpose is contrary to the prevailing laws and regulations.Similarly, a contract for sexual-service would be contrary to theIndonesian Legal System 149
  • Business Lawacceptable decency and moral standards and as such would bedeclared invalid. A contract that does not satisfy the third and forth elementsis considered to be null and void meaning that the law will hold thatthere is no valid and existing contract between the parties. Adecision of this nature by a court requires that the court also issuean order that returns the parties to their respective original statesprior to their entry into the voided contract.Contract Formation The Indonesian Civil Code does not recognize theories ofcontract formation in the same manner as that of common lawsystems, particularly as it does not define when parties to a contractconsented to be bound. Well established doctrines, however,provide that contract is considered to exist and therefore bind theparties when they have reached agreement; namely, when one part’soffer is accepted by the other party. It is generally held that contractis formed the exact moment when this acceptance is received by theofferor. In other words, a contract is created at the moment alegitimate offer has been accepted. The offer and acceptance can beexplicit or tacit. A written acceptance is effective upon receipt. Itshould be noted that a legitimate offer is irrevocable unless a powerto revoke has been reserved.Formalities As a general rule, there is no formal requirement for acontract to be written or registered before it is considered to bebinding on the relevant parties. However, there are some situationswhere a contract must be concluded formally – the contract must bein writing and executed by notarial deed. For example, everytransaction that deals with land, intellectual property rights, orincorporation of a limited liability company, must all be in writing150 Indonesian Legal System
  • Business Lawand registered in the relevant Registry Office. If a contract is to beused as evidence in a civil lawsuit, then the contract must have beenentered into under seal and the applicable stamp duty paid.Performance A valid contract shall bind the parties who have entered intoit and cannot be revoked unless by mutual agreement or pursuant toprovisions included in the contract, or for valid legal reasons. Thisserves as what the Indonesian contract law knows as the pacta suntservanda principle – a principle that states a contract binds only theparties entering into it. The parties, however, are not bound only bywhat the contract specifically provides, but also by the nature of thecontract, by reasonableness, custom, and statute. In addition, acontract shall not be detrimental or benefit a third party. Someexceptions, however, are made to conclude a contract that benefits athird party, for example, in the event of insurance. In insurance, athird party becomes the beneficiary of the contract. A contract must also be performed in good faith. In order topreserve the application of good faith, a civil case judge, who hasthe power to supervise the performance of a contract in accordanceto the principles of reasonableness and justice, may depart, ifnecessary, in rendering his decision from the contract provisions. All rights and duties arising out of a given contract pass tothe heirs of a party in the event of his death, unless the contractclearly provides otherwise.Breach of Contract (Default) An obligor, a contracting party who has to perform anobligation in a contract, should perform his obligation at the timeand in the manner agreed in the contract. Failure to do perform hisobligation would constitute a breach of contract or default. PursuantIndonesian Legal System 151
  • Business Lawto the Indonesian contract law, a party is considered to be in breachof contract if any one of these four conditions apply; namely, totalfailure to perform the obligation, failure to perform the obligation inthe time specified, failure to perform the obligation properly(contrary to the terms of the contract), and performs a prohibitedaction specified in the contract. Indonesian contract law provides various remedies thatcould be exercised against the breaching party, such as; specificperformance, damages or termination of the contract. Basically, theaggrieved party to a contract has the right to sue the breaching partyfor specific performance, if it is still possible or reasonable for thebreaching party to fulfill its obligations under the contract,especially in relation to the sale of land. Damages usually compriseof all expenditure in relation to the performance of the contract – allexpenses and costs actually incurred by the aggrieved party inreliance on the contract, loss – injury to the property of the creditorresulting from the default, and interest – lost profit. Provisionscontained in Book III of the ICC do not provide clear measures forcalculating monetary damages. It imposes limitations, however, onmonetary compensation. The debtor is liable only for the costs,damage, and interest which have been foreseen or which shouldhave been foreseen at the time of the formation of contract.Damages, however, are limited to the injuries which directly resultfrom the breach. In the event that performance is to be in the formof payment of money, the ICC permits the court to render a decisionon interest for late or non-payment with interest not to exceed 6%per year calculated from the date the petition was filed.Termination of contract Indonesian contract law recognizes ten ways of terminatinga contract; namely, by performance, by certified tender, bynovation, by compensation (set-off), by merger (confusion), byrelease, by destruction of the subject matter, by rescission, by152 Indonesian Legal System
  • Business Lawoccurrence of a canceling condition, and exceeding any statute oflimitation. Performance of a contract is the most common way ofterminating a contract, which denotes with the word ‘payment’.Generally, only the party concerned makes the payment, however, itis also possible to have a third party do so. If the third party doesthis without taking the creditor’s place, then the contract isterminated, whereas if the third party steps into the shoes of thecreditor, then it is known as subrogation. Certified tender plus deposit may discharge the contract inthe event the creditor refuses to accept payment. If the debtorwishes to make payment by offering money or movable goods (notimmovable goods), but the creditor refuses, then such money orgoods are to be deposited in the court at the responsibility of thecreditor. Novation occurs when the old contract is terminated and anew contract is born. It must be done explicitly and requires theconsent of both parties. Compensation occurs automatically if someone issimultaneously a creditor and debtor of another person and thecontract concerns a sum of money or a certain and similar quantityof goods. Thus, no special procedure or intervention of a third partyis required. Merger is a termination process whereby the positions ofdebtor and creditor unite in one person. This may occur when, forexample, the debtor marries the creditor or the debtor becomes theheir of the creditor. Release is a situation in which the creditor releases thedebtor from any obligation by conclusion of a new contract. Thedebtor has to accept the creditor’s offer to free him from theobligation.Indonesian Legal System 153
  • Business Law A contract concerning a delivery of goods is terminatedunder the following three situations: if the goods are destroyed, ifthe government issues a regulation prohibiting the sale of suchgoods, and if the goods are lost or become damaged in such a wayas to be unrecognizable. In order to terminate the contract, thedestruction of the goods must precede delivery and beyond theability of the obligor to prevent. Rescission occurs in the event that a contract concluded byan incompetent party is declared null or a contract in concludedbecause of duress, mistake, fraud or anything that violates the law,morals, and public order of the community, and is subsequentlyannulled. Occurrence of a canceling condition occurs in a contract bywhich a certain event is stated to be a cause of terminating thecontract. Therefore, if such event occurs, the contract is thenautomatically discharged. Running of the statute of limitations occurs thirty years aftereach and every contract comes into effect. The aggrieved party hasthe power to exercise his right to file a legal claim within 30 yearsof the date that the relevant contract came into force. If within suchtime he does not institute any such action, then pursuant to the ICC,all rights are discharged.Types of Contract Indonesian contract law recognizes two basic types ofcontract – general contract and special contract. General contractconsists of conditional contracts, temporal contracts, alternativecontracts, contracts giving rise to joint and several liabilities,divisible and indivisible contracts, and contracts that contain apunishment clause. Special contract, on other hand, comprises ofcontracts of sale, contracts of hire-purchase, contracts ofinstallment-purchase, contracts of lease, contracts of gift, contracts154 Indonesian Legal System
  • Business Lawof agency and representation, contracts of a free-loan, pledges andchattel mortgages, and contracts of warranty.Conclusion Although Indonesian contract law is still governed by BookIII of the Indonesian Civil Code inherited from the colonial period,people involved in the business sector including lawyers, advocates,judges, and the business community are relatively comfortable withthe existing legislation. Therefore, the demand for reform in theIndonesian contract law sphere does not seem as high as in otherareas of commercial law reform. Criticism was restricted to theimplementation and enforcement of contract relating to theefficiency of the judiciary area. Serious reform to secure properenforcement of commercial contracts is needed. Establishment ofnew specialized courts such as the commercial court or tax court isexpected to provide greater legal certainty with respect to theenforcement of contract.C. LAND LAWPreface The basic principles and provisions of the present landtenure structure in Indonesia can be found in the Basic AgrarianLaw, Law No. 5 of 1960 (BAL), which came into effect on 24September 1960. The nomenclature is a little misleading as theBAL does not only regulate agrarian matters it also regulatesIndonesia’s vast natural resources including minerals, territorialwaters, fish and other marine resources, oil and gas, space, andalmost all other natural resources deemed critical to the ongoingIndonesian Legal System 155
  • Business Lawnational development of Indonesia. Nevertheless, the BAL isgenerally referred to as the Land Law. According to the BAL, the pre-emptive and ultimate right isthe right held by the State (Hak Bangsa). The underlying premise ofthis concept is that all of Indonesia’s land and natural resources areowned by the people and as such the government of Indonesia asthe elected representatives of the people are empowered toadminister these vast lands and resources in the best interests of thecommunities and people that they serve. This right is all-encompassing in that it permits the State to regulate all mattersconcerning both publicly-owned as well as privately-owned landand resources and is often referred to as the Hak Menguasai Negaraor the Right of Control over the State. In Indonesia, Article 6 of the BAL states that all titles toland have a social function. This function is specifically that notonly is the holder of land entitled to make use of the land but is infact expected to utilize it in order to serve the general welfare of thecommunity. Based on the BAL, several implementing regulations havebeen enacted to regulate the land tenure structure in Indonesia,including different types of land titles, the rights and obligations oftitle holders, and measures to obtain title of land. The authority whohas jurisdiction with regard to land matters is the National LandInstitute (Badan Pertanahan Nasional/BPN). Besides BAL and its implementing regulations, customaryand Adat law still exist. However, these customary and traditionallaws are being consumed by the uniform application of the BALwhich has developed into the standard for the administration of landin Indonesia. Despite the BAL developing into the pre-eminent source ofland law in Indonesia there is a belief that the BAL enacted in1960is no longer reflective of the current community and public needswith respect to land law in Indonesia in the 21st century,156 Indonesian Legal System
  • Business LawType of Land Title and Their ParticularsPrimary and Secondary Titles of Land Under the BAL, land titles are divided into two categories;namely, primary and secondary titles. Primary Titles are derivedfrom the state and consist of: the Right of Ownership (Hak Milik),the Right to Till or Exploit (Hak Guna Usaha), the Right to Build(Hak Guna Bangunan), the Right of Use (Hak Pakai) and the Rightof Management (Hak Pengelolaan). All titles are required to beregistered or certified. Secondary titles are titles granted by othertitle holders and which are based on mutual agreement and consistof leases (hak sewa), the right of share cropping (hak usaha bagihasil), the right of land pledge (hak gadai) and the right of lodging(hak menumpang). The title holder of both titles has the same right to make useof the Land and to utilize it by himself/herself to extract a profitfrom someone else although this is traditionally based on anagreement by granting one of the secondary titles. Besides the aforementioned, there are also five importanttypes of land that must be acknowledged by companies who wish torun businesses in Indonesia. It must be noted that each of these titlesgive rise to different consequences.1. Right of Ownership (Hak Milik/HM) HM is the most complex form of ownership of land inIndonesia. It is subject to planning regulations, in which the holdercan use the land for any purposes, including for housing. It alsoentitles the holder to use the air space (the space above the land) aswell as the soil beneath it. However, HM does not allow the holderto exploit the natural resources found on or under the land as this isIndonesian Legal System 157
  • Business Lawa right that is regulated under the provisions of Law No. 11 of 1967on Mining. In principle, only individuals of Indonesian nationality andthe special legal entities stipulated in Government Regulation No.38 of 1963 (government banks, cooperatives, and religious andsocial bodies) can hold this title. Therefore, foreigners and legalentities, such as joint venture companies, cannot hold a HM title. There is no time limit on this title and it can be given orbequeathed to another, even on the holder’s deathbed. HM is alsoone of the titles that makes a person eligible for a mortgage inIndonesia (Hak Tanggungan).2. Right of Exploitation (Hak Guna Usaha/HGU) HGU is the principle title that applies to agricultural areassuch as plantations, fisheries, and cattle properties. A HGU isprovided by the State in order that a private legal individual orentity may utilize State-owned land. The holder is allowed to erectstructures so long as it is utilizing the land subject to the grantedHGU in some substantial and significant manner. In general, the right is granted for an initial maximum periodof 35 years for plantations, but can be extended for another 25 yearson the submission of an application seeking the extension. Theprevailing laws and regulations stipulate all necessary fees andcharges associated with the application for extension process. Thesepayments will be made to the State Treasury and constitute a formof non-tax revenue. The HGU right cannot be granted on areas of less than fivehectares and is not subject to any other limitations and large tracksof land are normally granted. However, in practice, the governmentwill not issue a right to a plantation if the proposed plantation areais less than 25 hectares.158 Indonesian Legal System
  • Business Law A HGU can be transferred and granted to another party andis eligible for Hak Tanggungan.3. Right of Building (Hak Guna Bangunan/HGB) The holder of this title is entitled to erect and possess astructure on the land. A HGB can exist on both State and privately-owned land. Most land in local areas is subject to a HGB grant fromthe government with respect to residential, commercial andindustrial land. The HGB title is also granted to most majordevelopment projects, such as energy and mining projects. The right is normally granted for an initial period of up to 30years and it can be extended for a further 20 years on application. Based on Government Regulation No. 40 of 1996, acompany, formed in the nature of investment, shall pay officialcosts (uang pemasukan) to the State Treasury for a period of 80years which is inclusive of the initial 30-year grant, the 20-yearextension and an additional renewal for a further 30 years after theissue of the HGB title by the relevant authority. The title is alsoeligible for Hak Tanggungan.4. Right of Use (Hak Pakai/HP) A HP is granted against specific plots of State or privately-owned land in order that the holder of the HP title may exploit theland for productive purposes. In practice, the right is usually onlygranted to enter a lease or some other equivalent set of terms ofagreement, rather than going through the formality of granting theright. The right can be held by Indonesian individuals or legalentities as well as by foreign residents for a maximum of 25 yearsand it can also be extended for another 20 years.Indonesian Legal System 159
  • Business Law5. Right of Management (Hak Pengelolaan/HPL) A HPL is given to State-owned companies and RegionalGovernments with respect to planning and development of State-owned land. It is usually given to those who will use the land forindustrial and/or business purposes. The holder has the power togrant a HGB and a HP. Many examples exist of the use of the HPLgrant such as the Pulogadung Industrial Estate and some low-costhousing projects including those developed by the State HousingCompany. The time period of the HPL is in accordance with the time inwhich the holder intends to use it for industrial and/or businesspurposes. This right is not eligible for Hak Tanggungan.Unregistered Titles of Land Besides the rights defined in the BAL, in rural areascustomary land titles, which are not registered, still exist. One ofthem is the Customary Right of Ownership (Hak Milik Adat), whichby law has to be converted to a registered Hak Milik and must beregistered since 24 September 1960. In Central Java, particularly inJepara, the Hak Milik Adat is called Hak Yasan and is referred to as“Letter C”. This right is known in West Java as “Girik”. In additionto Hak Yasan, there is also Village Land (Tanah Bengkok or “TanahJabatan”), which is given to and can be used by the Head of theVillage (Kepala Desa) during his/her tenure in office. Theoretically, Tanah Bengkok cannot be sold since it isregarded as “salary” for the Kepala Desa, thus it can only bepossessed and used during the term of office. However, in the eventthat this land is needed for the purpose of development, it can besold under Village Decree (Keputusan Desa/Rembug Desa) andconfirmed thorugh Governorial Decree.160 Indonesian Legal System
  • Business LawThe Land Acquisition ProcessLand Acquisition Methods Three things must be taken into consideration whenobtaining land: the status of the land, the status of the individualwho will acquire the land, and the willingness of the title holder tosurrender the land. In regards to the status of land, there are two kinds of land inIndonesia, State and private.1. State Land The only way to obtain State land is to apply for the relevant land title through an authorized state official, as stipulated in the regulation of the Department of Home Affairs No. 6 of 1972. To obtain a land title, applicants are required to pay the associated land taxes, which is 5% of the value of land and buildings minus IDR 30 million. In addition to the PPHTB (Pajak Penghasilan atas Pengalihan Hak atas Tanah dan/atau Bangunan - Income Tax over Transfer of Land dan/or Building), they are also required to pay the all other official costs to the State in accordance with State Minister for Agrarian Affairs/Head of the National Land Institute Regulations No. 4 and 6 of 1998. The procedure for granting a land title is stipulated in the Minister for Home Affairs Regulation No. 5 of 1973 and which has been amended by the regulations of State Minister for Agrarian Affairs/Head of National Land Institute No. 2 of 1993 and has recently been further amended by Minister of State for Agrarian Affairs/Head of BPN Regulations No. 2 and 3 of 1999.2. Private Land There are four legal methods to obtain private land, but it depends on the individual who wishes to posses the land as well as the type of title that they desire. The methods are:Indonesian Legal System 161
  • Business Law a. Available land which is based on an agreement with the title holder (such as a lease agreement) is usually used on the condition that a party wishes to use a small plot of land over a short period of time, say between 3-10 years, thus it is considered to not be necessary to posses a strong title over the land. b. If done by direct transfer, such as sale and purchase or exchange of land, the status of the individual who wishes to posses the land will be evaluated and taken into consideration. This is to avoid the possibility that the transfer will become null or void at law, thus making the particular land subject to this agreement the property of the State. A direct transfer is frequently used for sale and purchase. c. Indirect transfers or the relinquishment of land title is used when a company wishes to posses land, but is not eligible to hold the title. An example of this is a company that is trying to obtain both the title of Hak Milik and Hak Milik Adat. In order to possess these titles, the owner of the land must first release his/her title over the land in exchange for an agreed price that is to be paid as part of a sale and purchase transaction. The owner then declares that s/he has released the title over the land. This release should be in written form of a Notarial Deed and or at a minimum witnessed by a notary and confirmed by relevant State appointed body. The declaration states that the owner releases title over the land for the benefit of the company. It is preferred that the declaration be made before the Head of the Regional Land Office, who will then draft a new Deed. Additionally, in order to subvert the possible rejection of the release of title by the relevant State authority the Deed of Release usually includes a clause that expressly states that in the event of rejection that the owner permits the company to transfer the “rights” to any other qualified party. Thereafter, the request162 Indonesian Legal System
  • Business Law for the appropriate title should be submitted to the local Agrarian Affairs Office and the process is then complete on the issue of a certificate. The grant of land title in this procedure does not require the payment of any uang pemasukan to the State Treasury since the company has paid the price of the land to the owner, but there is an administration fee charged by the relevant local authority that must be paid. d. Expropriation – this is the last method that can be used for the purposes of obtaining land for the public’s benefit. Expropriation requires that the relevant parties, the owner and the individual who wishes to obtain the land, enter into negotiations in order to reach an agreement. In the event the parties fail to reach a mutually acceptable agreement with regards to terms and conditions to effect transfer then the law would allow for an expropriation of the property to occur. The expropriation principles are explicit that the State is subject to the law and as such must respect the rights of the individual and as a result the BAL stipulates a number of strict provisions that must be satisfied before expropriation can occur; namely, Article 18 of the BAL states that: (a) the land will be used in order to fulfill the public interest, (b) the expropriation must be accompanied by proper compensation, and (c) the expropriation must be executed based on a Presidential Decree. Once expropriation has occurred then the new owner of the land must submit the relevant applications to the relevant bodies to secure appropriate title over the land.Land Acquisition for Companies in the Framework of CapitalInvestment The emergence of fierce competition between developingcountries for foreign investment and the plain link between foreignIndonesian Legal System 163
  • Business Lawinvestment and the need to acquire title in land spurred thegovernment to improve and simply the land acquisition process forforeign investors. According to the new regulation, Minister of State forAgrarian Affairs/Head of BPN Regulation No. 2 of 1999, in orderto acquire land in accordance with the Regional Spatial Lay OutPlan, a company must be granted a location permit (izin lokasi),which is only valid as a transfer title permit.Foreign Ownership Land/Property Under Government Regulation 41 of 1996 (GR 41/1996),foreign residents in Indonesia, foreign companies withrepresentative offices in Indonesia, representatives of foreigncountries (Embassies and Consulates), and representatives ofinternational organizations are among the few categories of peoplewho can hold Hak Pakai. The definition of foreign residents, asdefined in GR 41/1996, is “foreigners whose presence in Indonesiagives opportunities to national developers”. Unfortunately, thisdefinition is able to be so broadly construed that any sort of uniformapplication is almost impossible to effect.D. CAPITAL MARKET LAWIntroduction The essence of the capital market, in general, is the same asthat of a conventional market; namely, a place where sellers andbuyers meet to transact. The capital market’s primary function is tofacilitate meetings between the supplier of funds and the users offunds where the underlying aim is to finalize either a mid to long-term investment. According to Article 1(13) of Law No. 8 of 1995,164 Indonesian Legal System
  • Business Lawthe Capital Market is the forum for the activities of trading andoffering securities to the public, as well as to supervise the activitiesof public companies that have offered securities to the public, aswell as the supervision of the activities of securities relatedinstitutions and professions. The activities of the Indonesian capitalmarket will be defined below. The capital market is not a new development in Indonesia.On the contrary, the activities related to the trading of stocks andbonds have been a familiar line of business in Indonesia since the19th century. The book, Effectengids, published by Verreniging voorden Effectenhandel in 1939, states that the trading of stocks hasoccurred since 1880. However, the major difference between thetrading activities of the past and the trading activities of today isthat the buying and selling of stocks and bonds in the late 19thcentury occurred without an official trading floor. Nevertheless,even an official trading floor is not something that is new toIndonesia as the Indonesian Capital Market of the early 20th centuryestablished the first official trading floor on 14 December 1912 inBatavia (now Jakarta). In the period between 1912 and 1925 therewas significant growth in the capital market and the amounts ofstocks and bonds being traded, this growth was the driving forcebehind the establishment of the Surabaya trading floor on 11January 1925 and the Semarang trading floor on 1 August 1925.Currently, in 2005, there are two trading floors – Jakarta andSurabaya. The Indonesian Capital Market closed during World War IIas a consequence of the complete deactivation of the world’sCapital Market systems and also because of the belief that it wasneither feasible not possible to engage in capital market activitiesduring a war. After the war the government enacted EmergencyLaw No. 13 on 1 September 1951, this was later confirmed as LawNo. 15 of 1952 on the Stock Exchange. This led to the reopening ofIndonesia’s Stock Exchange on 1 September 1952 after a closure of12 years. The law mandated the appointment of staff to the StockIndonesian Legal System 165
  • Business Lawand Financial Trade Association and this management comprised of3 State banks and several broker-dealers and Bank Indonesia asadvisor. However, the Stock Exchange survived only 6 years asIndonesia suffered heavily under a sluggish domestic andinternational economy and declining world-wide stock activities.Another notable cause for the declining stock exchange was theconfrontationalist policies the government had adopted towards itsformer colonial masters, the Netherlands. The end result of thispolicy was that the majority of the remaining Dutch citizens andtheir business interests in the community chose to leave taking asmuch of their capital and investment with them. This situation continued to deteriorate and was furtherexacerbated by tension between Indonesia and the Netherlands overWest Irian as well as the nationalization of Dutch companies stillwith business interests in Indonesia. The nationalization of Dutchfirms was based on Law No. 86 of 1958 on Nationalization and aninstruction from BANAS (Badan Nasionalisasi PerusahaanBelanda) that prohibited the Indonesian Stock Exchange fromtrading any remaining Dutch company’s stocks and to cease alltrade in Dutch firms whose stocks were denominated in Dutchcurrency. This led to a number of other related problems including therapidly increasing rate of inflation that was seriously reducing thepublic’s trust and belief in the the financial markets of Indonesia.This inflationary pressure resulted in a significant depreciation ofthe Rupiah and the rapidly deteriorating economy which culminatedin the political turmoil and tragedy that was to befall Indonesia in1965-1966. After the closure of the Indonesian Capital Market in 1952there had been an almost constant ebb and flow. Finally, in 1976through the issue of Presidential Decree No. 52 of 1976, theIndonesian Capital Market Supervisory Agency (Bapepam) wasestablished and was granted the following duties and functions:166 Indonesian Legal System
  • Business Law1. Evaluate whether the companies that are to sell their shares through the capital market have complied with the requirements and are sound and fit;2. Organize an effective and efficient capital market;3. Extensively supervise the development of Issuers It was anticipated that these duties and functions granted toBapepam would allow for the creation of an orderly, fair, andefficient capital market that was able to protect the interests of boththe public and investors. These duties and functions are similar tothe main tasks granted to the Securities Exchange Commission(SEC) in the United States. Finally, to clarify and strengthen these duties and functionsthe government enacted Law No. 8 of 1995 on the Capital Market(Capital Market Law). Bapepam falls under the auspices of theDepartment of Finance and the Chairperson of Bapepam isappointed by the President and reports to the Minister of Finance.The Indonesian Capital Market The Indonesian Capital Market has undergone significantgrowth since it was reestablished. Today, the Jakarta and SurabayaStock Exchanges have become the central features of theIndonesian Capital Market with each retaining their own distincttrading floor characteristics. Initially, both floors relied on manualtransaction systems however the recent automation of the Jakartatrading floor with the introduction of the Jakarta AutomatedTrading System (JATS) has resulted in much larger volumes oftrade and accountability. The JATS is a transaction system design tobe integrated with the clearing and settlement system as well asintegrated with the depository system to improve accountability andtransparency in transactions from which it is hoped that the public’trust and belief in the system will drive future trading growth. Theclearing and settlement system is managed by Indonesian ClearingIndonesian Legal System 167
  • Business Lawand Guarantee Corporation (KPEI) and the depository system ismanaged by Central Securities Depository Agency (KSEI). The Indonesian capital market community comprises notonly of Bapepam as the supervisory agency, but the Clearing andGuarantee Corporation and the Central Securities DepositoryAgency, both of which are Self Regulating Regulatory Bodies.However, the Law in fact mandates that under the auspices ofBapepam there are 4 self-regulatory bodies; namely, the Jakarta andSurabaya Stock Exchanges, the Clearing and GuaranteeCorporation, and the Central Depository Agency. The four SelfRegulatory bodies are privately-owned companies whose shares areowned by the Capital Market community. The Jakarta StockExchange and the Surabaya Stock Exchange were established notlong after the Indonesian Capital Market was reestablished, whereasthe Indonesian Clearing and Guarantee Corporation and CentralDepository Agency were established based on the Capital MarketLaw. The Indonesian Clearing and Guarantee Corporation (KPEI-Kliring dan Penjaminan Efek Indonesia) was founded to provideclearing and guarantee services in the settlement of stock exchangetransactions in an orderly, fair and efficient manner. The KPEI wasestablished as a limited liability company based on Deed ofEstablishment No. 8 dated 5 August 1996 in Jakarta by the Jakartaand the Surabaya Stock Exchanges, with each holding 90% and10% respectively of the founding shares issued of IDR 15 billion.The KPEI received its confirmation as a legal entity from theMinister of Justice of the Republic of Indonesia on 24 September1996 and on 1 June 1998 it received the relevant license to operateas a Clearing and Guarantee Corporation based on Decision LetterNo. Kep.-26/PM/1998 of the Capital Market Supervisory Agency(Bapepam). Although formed and operating as a corporation, theKPEI is in fact a non-profit organization as all of its revenues areallocated to finance its operations, while its net profit, if any, isfully retained towards the continuity of its mission.168 Indonesian Legal System
  • Business Law The Central Depository Agency (KSEI-Kustodian SentralEfek Indonesia) was established pursuant to the provisions of theCapital Market Law and its main duties and functions are to provideorderly, appropriate, efficient central custodian and transactionsettlement services. The KSEI was established on 23 December1997 and obtained the necessary licenses to commence fulloperations on 12 November 1998. Aside from the Capital Market Law there are a number ofother regulations that govern the operations of the IndonesianCapital Market:1. Government Regulation No. 45 of 1995 on the Implementation of the Activities of the Capital Market activities (this regulation revoked Presidential Decree No. 53 of 1990 on the Capital Market)2. Government Regulation No. 46 of 1995 on the Procedure of Investigation in the Capital Market3. Ministry of Finance Decision No. 645/KMK.010/1995 revoking Ministry of Finance Decision No. 1548/KMK.013/1990 on the Capital Market and since amended by Ministry of Finance Decision No. 284/KMK.010/19954. Ministry of Finance Decision No. 646/KMK.010/1995 on Stock Ownership or Mutual Funds for Foreign Investors5. Ministry of Finance Decision No. 647/KMK.010/1995 on Stock Ownership for Foreign Investors (up to a maximum of 85% of the capital stock)6. Ministry of Finance Decision NO. 455/KMK.010/2003 dated 17 July 2003 on Capital Requirements for Brokerage Firms7. All Regulations issued by Bapepam since 17 January 1996Indonesian Legal System 169
  • Business LawCurrent Activities in the Indonesian Capital MarketA. Scripless Trading In July 2000, the Indonesian Capital Market commencedScripless Trading to enhance market liquidity and to eliminate theoccurrence of lost and forged stocks as well as to simplify theprocess of transaction settlement. The introduction of Scripless Trading has meant that allprevious transactions that relied on paper to be transacted have beeneliminated and replaced with a computer-based electronic systemallowing both the transaction and subsequent settlement to occurelectronically. The owner of shares will only have a confirmation ofthe record and the status of the relevant shares. The implementationof scripless trading itself has led to a reduction in white collar crimewithin the Capital Market, particularly related to the handling ofshare certificates. The Capital Market Law allows for theimplementation of a scripless trading system, although it isimportant to note that scripless trading is not specifically addressedin the Law. Article 55 of the Capital Market Law simply states thatsettlement may occur in a number of different ways, such as book-entry, physical delivery or other means stipulated in GovernmentRegulations. However, the Elucidations to this Article do state thatelectronic settlement or settlements using new technology may beutilized to effect settlement. The remainder of the regulatoryframework with respect to scripless trading has been issued byBapepam, the Central Securities Depository Agency, and theIndonesian Clearing and Guarantee Corporation. Scripless trading is a feature of the Jakarta Stock Exchangein comparison the Surabaya Stock Exchange currently prefers aRemote Trading system. However, since 2002 the Jakarta StockExchange has also allowed Remote Trading as a means to increasemarket access, market efficiency, and simply the procedures relatedto trading and the frequency with which trades may be made.170 Indonesian Legal System
  • Business LawB.The Capital Market and Islamic Law (Sharia) As a country with the biggest Moslem population in theworld it is hardly surprising that Indonesia is not only open tofinancial and banking activities based on Islam nor is it surprisingthat financial services based on Islam are offered to the public. Thefirst significant move towards the provision of financial servicesbased on the principles of Islam saw the establishment of BankMuamalat Indonesia in 1990. This was quickly followed by theestablishment of a number of other banks offering similar servicesand visions of Islamic based financial services. The rapid development of Sharia based financial serviceshas seen Memorandums of Understanding (MOU) signed betweenBapepam and the Sharia National Committee-Majelis UlamaIndonesia (Dewan Sharia Nasional-Majelis Ulama Indonesia- DSNMUI) on 14-15 March 2003 regarding the provision of Sharia basedcapital market services. Later, the Sharia National Committee alsosigned another MOU with Jakarta Stock Exchange for the provisionof Sharia based share trading activities. To implement the provisions of the MOU, the Jakarta StockExchange and PT. Danareksa Investment Management establishedthe Jakarta Islamic Index (JII). The primary purpose of the JakartaIslamic Index is to act as a benchmark in measuring marketactivities based on Sharia. Currently, there are approximately 30corporate stocks listed on the JII. There is a fundamental difference between the conventionalcapital market and the capital market based that is based on theprinciples of Sharia. The concept of short selling on the capitalmarket is neither a principle nor an acceptable means of transactingon the Sharia based capital market. The Sharia based capital market,in general, focuses on long-term investments. Furthermore, stockownership means that all profit and loss is accepted as a mutual riskof the investment and assumed jointly between all stock holders.Indonesian Legal System 171
  • Business Law In addition to the stocks that are issued within the Shariabased capital market system there are Sharia bonds. Sharia bondsare based on a number of acceptable Sharia principles; namely,akad (agreement) and mudharabah (profit-sharing). The Nisbah orthe percentage of profit sharing will be stated before the agreementsare executed. Finally, the Sharia based capital market also offersSharia based mutual fund investments. Despite having the largestMuslim population in the world many of the financial servicesbased on Sharia principles remain in their infancy in terms ofpopularity compared to other non-Sharia based financial services.Nevertheless, it is important to recognize that this is a rapidlygrowing segment of the capital investment community as thecommunity becomes more aware of and comfortable with thequality of the investment options offered.E. BANKING LAWIntroduction In Indonesia, the banking industry constitutes about 93% ofthe total assets of the entire financial industry of Indonesia and theremaining 7% is spread among players in the non-banking industrysuch as insurance and multi finance corporations. The largepercentage of these funds held by the banking sector is intricatelylinked and can trace its origins to Minister of Finance Decision No.1062/KMK.00/1988 on the Establishment of State Banks, RegionalDevelopment Banks, National Private Banks, and CooperativeBank. This Decision led to a huge increase in the number ofoperating and established Banks. A brief overview of the dataindicates that in October 1988 some 124 banks were establishedincluding 13 Non-Bank Corporations. This number further172 Indonesian Legal System
  • Business Lawincreased during the period from 1988 to 1997 where the number ofestablished banks increased from 124 to 240 banks. In mid-1997, the effects of the Asian monetary crisis andeventual meltdown of a number of regional economies commencedwith the rapid depreciation of the Indonesian Rupiah (IDR) andworsened as a result of the political turmoil that plagued 1998 andhas continued in varying degrees through to 2005. The depreciationof the IDR quickly consumed the Indonesian banking sector andmany of the banks established in during the period from theconfirmation of the Ministerial decision were now in danger ofcollapsing or had already collapsed. As banks collapsed they werebeing bailed out by Bank Indonesia, initially as a means to protectcustomer’s savings and deposits but as time went on BankIndonesia quickly realized that the financial bailing out of insolventinstitutions was too costly to continue to pursue on a large scale.The financial crisis was felt hardest by bigger banks who wereholding considerably larger amounts of offshore borrowings andlarger percentages of non-performing loans and bad debt. Smallerbanks were not immune to the financial crisis occurring aroundthem but carrying much less bad debt and non-performing loans asa percentage of the assets meant that they were better able toweather the circling financial storm.Banking Law in Indonesia Indonesian Banking Law has a long history and Widjanartoclassified these periods of history into nine distinct phasescommencing with the end of Dutch colonization through to theperiod of 1988-1993. The Banking Law in Indonesia can trace itspost-colonization roots to Government Regulation in Lieu of Law(Perpu or Interim Law) No. 2 of 1946 which created Bank NasionalIndonesia (BNI). In 1953, Law No. 11 on Bank Indonesia wasenacted. Law No. 11 of 1953 was then amended by Law No. 13 of1968 on the Central Bank. However, in 1999, the GovernmentIndonesian Legal System 173
  • Business Lawenacted another new law, Law No. 23 of 1999 on Bank Indonesiasince the previous law was considered to no longer represent thecurrent status of the banking sector in Indonesia and rather thancontinue to amend the original law to ensure that it remain relevantand enforceable it was determined that the best means to modernizethe banking law was to draft and enact a new law therefore a newlaw was drafted and enacted and the old banking law was repealedin its entirety. Banking activities in Indonesia are governed by Law No. 14of 1967 on Banking as amended by Law No. 7 of 1992. In 1998, afurther series of amendments to the Banking Law were contained inLaw No. 10 of 1998. The general financial crisis afflicting Indonesia was keenlyfelt in the over-exposed banking sector as the IDR continued itsrapid depreciation against the United States Dollar (USD). A largenumber of banks had immediate liquidity problems and quicklybecame insolvent and despite this insolvency many continued to goabout business as normal waiting and hoping that the governmentthrough the Central Bank would bail them out. During this period ofrapid decline in the public confidence of the Indonesian bankingsector the government elected to provide liquidity funds to bankswhich it considered to be critical to the recovery of he sector in thefuture. Many of the smaller banks in liquidity trouble were either tobe consolidated into larger merged banks or liquidated. Thegovernment restructuring program for the banking sectorcommenced in 1998 and included the following:1. the injection of government capital into viable banks through the issuance of recapitalization bonds;2. the introduction of a blanket guarantee;3. the establishment of the Indonesian Bank Restructuring Agency (IBRA);4. corporate restructuring;174 Indonesian Legal System
  • Business Law5. improvement of corporate governance; and6. bringing supervisory and regulatory practices closer to international standards. The roots of the problem in that precipitated the Indonesianeconomic crisis related to non-performing loans and considerablelevels of offshore foreign debt held by both the private and publicsectors. To understand how it was possible to carry so muchoffshore foreign debt and non-performing loans requires only abrief examination of corporate governance principles and practicesin Indonesia prior to the crisis with respect to credit and riskanalysis it was invariably lacking in most cases and non-existent inthe others. In February 1993, Booz Allen & Hamilton forecast thatproblem loans (both under and non-performing) held by Indonesianbanks would constitute somewhere in excess of 20% of alloutstanding loans based on its analysis of figures from 1990through to 1992 which indicated a significant increase in thpercentage of poor and non-performing loans – 6% in 1990, 11% in1991, and 17% in 1992. In an attempt to deal with the continuing financial andbanking crisis the government devised and commencedimplementation of a comprehensive restructuring plan in 1999. Theestablishment of the Indonesian Bank Restructuring Agency(IBRA) at the end of January 1998 was intended to ensure adequatepolicy direction and supervision of the restructuring process. IBRAwas created and established through the enactment of Perpu No. 17of 1999 on the Indonesian Bank Restructuring Agency. The primaryduties and functions of IBRA pursuant to the Perpu are:(i) verify customer claims under the blanket guarantee scheme;(ii) dispose of assets from banks that have been taken over;(iii) restructure and sell loans transferred from banks; and(iv) divest government ownership in recapitalized banks.Indonesian Legal System 175
  • Business Law Aside from the establishment of IBRA to strengthen thesupervision of banks, Bank Indonesia (BI) was trying to manageand integrate its supervisory functions with that of IBRA.Statements at the time indicated that BI was fully aware that thebanking crisis stemmed from weaknesses in its own performance ofthe supervision of banks. To overcome these deficiencies BI hasbeen concentrating and refocusing its initiatives on the followingaspects:• harmonizing the organization of bank supervision procedures, particularly regarding structure and responsibility;• improving bank supervision management including, but not limited to, more efficient and transparent supervision, more competent supervisors, accountability and recognition, as well as reward and enforcement;• introducing risk-based supervision;• rectifying prudential regulations with emphasis on risk control. Other efforts have also been undertaken to improve thestability of the Indonesian banking system, such as the introductionof new banking and central banking laws, particularly the newBanking Law of 1998, which:• transferred the authorization for bank licensing from the Minister of Finance to BI;• relaxed the limit on foreign ownership of Indonesia- incorporated banks, raising it to 99%;• encourages the development of Sharia banking;• narrowed bank secrecy provisions to cover only the information on deposits (name and amount) instead of total assets and liabilities;176 Indonesian Legal System
  • Business Law• provides for more comprehensive and stricter criminal sanctions, and determines their minimum levels;• provides for the establishment of a deposit protection scheme by 2004 at the latest;• provides for the establishment of a temporary special agency to assist with the banking restructuring program. The Indonesian government introduced the Act on ForeignExchange Traffic and the Exchange Rate System in 1999 whichprovides a legal basis for monitoring the flow foreign currencyexchange and improves the ability to enforce prudential provisions.The law requires banks to submit to BI a report containing themovement of financial assets and liabilities between residents andnon-residents. Complete, accurate and timely reports that include allpertinent information regarding foreign exchange flows as a meansof supporting a prompt monetary policy response. This is primarilyto ensure that the stability of the Rupiah is maintained. Information Technology (IT) is a critical reform anddevelopment issue for Indonesian banks and the banking sectorgenerally. Overall, the utilization of IT and technology generallythroughout the Indonesian banking sector was best described aspoor however a recent drive towards simplifying and facilitatingpersonal and corporate banking has seen a rapid increase in the useof IT. This development has been so rapid that the primary responsefrom BI to ensure that the regulatory framework is in place to dealwith the new issues that will arise is to issue Circulars enumeratingpolicy and regulatory standards. It is expected that most of theseCirculars will eventually be enacted into law to provide greaterlegal certainty. One of these IT developments that has had animmediate and significant impact on the Indonesian bankingindustry is ‘Internet banking’. To address this rapidly developingarea of banking services BI issued Circular No.6/ 18 /DPNP, dated20 April 2004 on the Implementation of Risk Management inInternet Banking Activities. The Circular from Bank Indonesia is inIndonesian Legal System 177
  • Business Lawessence a set of guidelines that banks should follow and implementas part of their respective IT policy.Sharia Banking In Indonesia Today, the Indonesian banking system also recognizesSharia banking. Although Sharia banking has been a part ofIndonesian banking services for some years the development of aSharia banking system has only recently come to the fore as asignificant alternative to traditional banking methods and practices.The driving force behind Sharia banking and financial servicesdevelopment is clearly demand from the public for appropriatebanking and financial services that comply with the strict Shariabanking and financial principles. In response to these demands thecurrent law through amendments to Law No. 7 of 1992 on Bankingas amended by Law No. 10 of 1998, and finally Law No. 23 of1999 on Bank Indonesia is a legislative attempt to regulate Shariabanking and banking practices. Since the enactment of the legislation defining andregulating Sharia banking there has been considerable rapid andsustained growth of 74% annually. Bank Indonesia’s primaryfunction, as the banking regulatory authority, is to ensure thedevelopment of a sound Sharia banking system and set of governingprinciples. The banking and financial crises of 1997 and 1998highlighted that the sound fundamentals of the Sharia bankingsystem allowed it to weather the financial and banking crisis muchbetter than the traditional banking alternatives. The main reasonbehind this better performance relates to the rates of return that arepaid to depositors as they are not based on strict market ratesallowing Sharia banks to channel relatively lower fund managementcosts back to their clients.178 Indonesian Legal System
  • Business Law According to the Blueprint for Islamic BankingDevelopment in Indonesia issued by Bank Indonesia, Shariabanking development should be conducted in accordance with theactual needs and expectations of the stakeholders of the Shariabanking sector in Indonesia that includes:• Sharia commercial banks, Sharia banks, and Sharia rural banks• Bank Indonesia as the banking regulatory and supervisory authority• National Sharia council (DSN)• Muamalat Arbitration Board (BAMUI)• Other Sharia financial institutions: Takaful (Sharia insurance), Baitul mal wat Tamwil, BAZIS, and Sharia securities companies• Other regulatory bodies: Department of Finance and the Capital Market Supervisory Agency (BAPEPAM)• Universities/educational institutions concerned with developing training programs on Sharia finance and economics• Organizations and companies related to Sharia economic and finance such as: the Sharia Economic Society (MES), Association of National Sharia Banks, the Jakarta Stock Exchange, and vendors, among others.• The general public Further, the strategic objectives of the Sharia bankingdevelopment include:• Maintaining a high level of competitiveness while complying with Sharia principles• Playing a significant role in sustaining the national economy and public prosperityIndonesian Legal System 179
  • Business Law• Global competitiveness through compliance to international operational standards However, the success of Sharia banking development fullydepends upon the stakeholders. Therefore, a uniform vision andproper coordination are the keys to success and the factors mostlikely to support sustainable Sharia banking development in thefuture.F. SECURED TRANSACTIONS LAWIntroduction In Indonesia Hak Tanggungan (Indonesian Security Rightupon Land or mortgage) and Fiduciary Security are now two widelyused forms of security, especially since both are already regulatedunder Indonesian law with the implementation of Law No. 4 of1996 on Hak Tanggungan and Law No. 42 of 1999 on FiduciarySecurity (Undang-Undang Hak Tanggungan/ “UUHT”). While HakTanggungan is only over immovable property, land and land relatedobject, the fiduciary security is designed to cover moveableproperty either tangible or intangible and also immoveable propertythat can not be encumbered with the Hak Tanggungan.Hak Tanggungan1. Definition and Object of Hak Tanggungan One method of securing obligations is by a mortgage.Unlike other mortgages, which also include a pledge where acreditor can occupy the property encumbered with the relevantmortgage, the Law of Hak Tanggungan only provides the creditor180 Indonesian Legal System
  • Business Lawwith an in jure right which means that there is no immediateoccupancy right attached to the mortgage. On 9 May 1996 the Indonesian Government enacted LawNo. 4 of 1996 on Hak Tanggungan. This new law repealed theprevious hypothec provisions contained in the Indonesian CivilCode in so far as it related to land and other assets related to themortgaged land. In Indonesia, the Hak Tanggungan on land and land relatedfixtures is the only security right under which a land title is placedas defined in the Basic Agrarian Law (“BAL”) with or withoutother fixtures forming a totality with the land for security of aparticular loan, which gives priority to a particular creditor overother creditors. The Hak Tanggungan shall give the right to thecreditor to sell the land through a public auction without therequirement of a court order permitting it to do so, as the certificateof Hak Tanggungan serves as a court order. The land title which can be placed by Hak Tanggungan are(1) Hak Milik (right of ownership); (2) Hak Guna Usaha (right totill or right to exploit); (3) Hak Guna Bangunan (right to build); (4)Hak Pakai (right of use) and (5) Hak Milik atas Satuan RumahSusun (Strata Title). Hak Tanggungan can also be attached to theland including the buildings and fixtures on that land.2. Procedures for Placing and Registering a Hak Tanggungan The formal procedures for placing and registering a HakTanggungan can be described as follows:1. The creditor and debtor sign a credit agreement simultaneously. The debtor or the title holder of the land then signs either a power of attorney to encumber the Hak Tanggungan (Surat Kuasa Membebankan Hak Tanggungan or “SKMHT”) or a Deed granting the Hak Tanggungan (Akta Pemberian Hak Tanggungan or “APHT”) before the relevant Land DeedIndonesian Legal System 181
  • Business Law Official (Pejabat Pembuat Akta Tanah or “PPAT”). The APHT must clearly identify the plot or plots of land being used as security and the total amount of the loan being secured. Any buildings, plant or others fixtures attached to the land sought to be covered in the Hak Tanggungan must also be specifically described in the APHT.2. Within 7 (seven) working days as of the date of the APHT, the PPAT must submit the APHT and Land certificate to the Local Land Officer to register the Hak Tanggungan.3. On the 7th calendar day following the receipt of the APHT and land certificate by the Local Land Officer, they must issue the Hak Tanggungan land book and note the date of registration. By law, at this stage, the Hak Tanggungan will be effective and will provide the creditor with the status of a preferred creditor. Thereafter, a copy of the Hak Tanggungan book and copy of the APHT shall cause the issue of the certificate of Hak Tanggungan. At the same time, the Land Office shall record the Hak Tanggungan in the original land book at the Local Land Office and the original land certificate. Certificate of Hak Tanggungan consists of a copy of the HakTanggungan land book and a copy of the Hak Tanggungan Deed.3. The Right of Priority A holder of Hak Tanggungan has a priority right over othercreditors upon encumbered land and has a priority right to have anyoutstanding loan and debt payments settled from any fundsgenerated from the liquidation of the property subject to the HakTanggungan. Nonetheless, it is possible that there is multiple HakTanggungan against the one plot of land with each being held by adifferent creditor. Therefore, the priority right rank of the HakTanggungan is based on the date of registration of the HakTanggungan. Simply, the first registered Hak Tanggungan shall182 Indonesian Legal System
  • Business Lawhave first right of settlement and each following Hak Tangunganholder will receive payment so long as funds from the sale of thesubject of the fiduciary security remain.4. The Transfer of the Hak Tanggungan In the case that loans are transferred or assigned to otherparties, the Hak Tanggungan secured for the loans are transferredalso to the other parties and should be registered based on thetransfer or assignment agreement. However, a new APHT is notrequired for this process.5. The Cancellation of Hak Tanggungan The cancellation of the Hak Tanggungan occurs at the pointin time any of the following occur: (1) cancellation of the debtsecured by the Hak Tanggungan; (2) release of the Hak Tanggunganby the Hak Tanggungan Holder; (3) a clearing of the HakTanggungan based on a ranking stipulation by the Chief Justice ofthe District Court (“Roya”), and (4) a cancellation of the right to theland which is subject to the Hak Tanggungan.6. The Enforcement of Hak Tanggungan Under the Hak Tanggungan Law, creditors have the right toimmediate execution (parate executie) upon the debtor’s property.On the debtor’s default, the creditor may execute the securedproperty without having to comply with the civil procedural law andprocedures of seizure. Therefore, a Hak Tanggungan holder enjoysthe right of direct execution, which is a relatively simple and cost-efficient means of ensuring payment of outstanding debts.Nevertheless, unless the debtor agrees to the auction, the AuctionOffice, which conducts and supervises the public auction, requires aIndonesian Legal System 183
  • Business Lawcourt order for the auction, which in veritably is a costly andlengthy process.7. The Position of the Holder of the Hak Tanggungan (mortgage) incases of Bankruptcy The position of the Hak Tanggungan’s holder in the order ofdistribution of the debtor’s assets remains unchanged by adeclaration by the debtor of bankruptcy. However, to enforce theHak Tanggungan (for closure), the Hak Tanggungan holder has towait 90 (ninety) days as of the declaration of bankruptcy by thecourt. (Article 56A of the Bankruptcy Law) If the Hak Tanggungan holder does not enforce its rightwithin the specified time, the curator or receiver at any subsequentauction of bankruptcy assets will carry execute any collateralfacility comprising the Hak Tanggungan holder’s right to share inthe proceeds of any sale. If the proceeds are insufficient to satisfythe Hak Tanggungan holder’s claim, then the Hak Tanggunganholder becomes a general creditor with respect to the settlement ofany remaining and outstanding debts.Fiduciary Security1. Definition of Fiduciary, Fiduciary Security, Grantor, and Grantee of the Fiduciary Security Fiduciary security is a relatively new type of security inIndonesia. Law No. 42 of 1999 on Fiduciary Security was enactedon 30 September 1999. Fiduciary is a transfer of the right of ownership of a propertybased on trust with the provision that the property transferred in stillheld by the owner of the subject property. Fiduciary security is aform of security right over moveable property either tangible or184 Indonesian Legal System
  • Business Lawintangible also over immoveable property that cannot be attached toa Hak Tanggungan (mortgage), in which the fiduciary grantorretains the property transferred that is being used as a Security topay the loan and it provides the fiduciary grantee with a priorityright over other creditors. The fiduciary grantor is an individual or a corporation thatowns the property that is to subject to the fiduciary Security. Thefiduciary grantee is an individual or a corporation that is owed adebt whose payment of which is guaranteed by a fiduciary security.2. The Scope of the Law on Fiduciary Security Matters that are not within the scope of the law of fiduciaryguarantee include Hak Tanggungan (mortgages) related to land andbuildings so long as the regulations require registration; hypothecon registered ships whose bruto volume is 20m3 or more; hypothecon aircraft; and, pledges.3. The Encumbrance of a Fiduciary Security A fiduciary guarantee is an accessoir agreement of an initialagreement that gives rise to one or more obligations on the relevantparties to the agreement. Granting a fiduciary security for securingthose obligations must be made with a Notarial Deed in Indonesianand specifically state that it is a Fiduciary Security Deed. The Deedmust, at least, note the identities of both the grantor and the granteeof the fiduciary security; all relevant data on the initial agreementthat is to be secured with the fiduciary security; a description on theproperty which is subject to the fiduciary security; the nominalvalue of the security; and, the nominal value of the property subjectto the fiduciary security. Furthermore, the Deed must also specify whether the debtsthat are secured by the fiduciary security are existing debts, futureIndonesian Legal System 185
  • Business Lawdebts that have already been agreed in specific amounts, or a debtthat can be measured at the nominal value at the time of theexecution in accordance with the initial agreement that gave rise tothe original obligation. A fiduciary security can be given against more than oneobject, a debt that already exists, or that will accrue in the future.The provision of a fiduciary security for some future debt does nothave to be contained in a separate security agreement.4. The Registration of the Fiduciary Security The property that is the subject of the fiduciary securitymust be registered at the Fiduciary Registry Office. The fiduciarygrantee themselves, or their attorney, or someone on appointed ontheir behalf can complete the application for registration. The Registry Office will then note the fiduciary guarantee inthe Fiduciary Register Book, then issue and give the certificate ofFiduciary Security to the fiduciary grantee and date the certificateon the day it received the application. The objective of the registration itself is to give legalcertainty to both the fiduciary grantor and grantee as well as to anythird party interest in the fiduciary security.5. The Transfer of the Fiduciary Security The transfer of loans secured with a fiduciary securityresults in the transfer of all of rights and duties of the fiduciaryguarantee to the new creditor by law. The new creditor must registerthe transfer at the Fiduciary Registry Office. The fiduciary securityremains in force against the property noted in the fiduciary securityirrespective of who may have physical possession of the object,except if the transfer was completed and effected in a manner whichis not common within the business community. However, in order186 Indonesian Legal System
  • Business Lawto secure the fiduciary security interest, the transfer of a fiduciaryguarantee where the object is a stock of goods, then those stocksmust be exchanged for some other equivalent good or stock ofequivalent value.6. The Cancellation of the Fiduciary Security A fiduciary security is no longer valid under the followingcircumstances: the closure of the debt secured by the fiduciarysecurity; the withdrawal of the right of fiduciary security by thefiduciary grantor; and the abolishment of the property that was theobject of the fiduciary security. In the event that the property that was the object of thefiduciary security is destroyed but is fully insured, then anysubsequent insurance claim may replace the property of the originalfiduciary security. The fiduciary grantor must inform the Fiduciary RegistryOffice on the cancellation of any fiduciary guarantee and then theOffice will issue a statement that the stated fiduciary security deedis no longer valid.7. The Right of Priority A fiduciary grantee has a priority right over other creditorsand has the priority to receive payments of debt from the anyincome gained in the execution of the fiduciary security. Moreover,those rights cannot be eliminated in the case of bankruptcy orliquidation of the fiduciary grantor since the fiduciary security is aright of security to payment of debt. Nevertheless, in the law ofbankruptcy, there is also a provision that the property that becomesthe object of fiduciary security is be dealt with separately to those ofthe other bankruptcy or liquidation assets.Indonesian Legal System 187
  • Business Law8. The Execution of the Fiduciary Security If the debtor or the fiduciary grantor fails to pay the debt, theproperty that becomes the object of the fiduciary security can beexecuted. The execution can be done in 3 ways:a. Executing title by the fiduciary grantor without the help of the court. However, in practice it is difficult to execute and enforce the security without the assistance of the court.b. Selling the property that is the object of the fiduciary security through public auction then utilize the resulting income to pay the debt.c. Selling the property that is the object of the fiduciary security by non-notarial deed. This can be done based on the agreement by both grantor and grantee of the fiduciary security provided that the agreement ensure the maximum price of the asset is reached in order to maximize the benefits derived by both parties. The conditions that must be satisfied are: 1. The sale must be completed one year after the public notification by the fiduciary grantor and/or grantee to interested parties. 2. Announced in two newspapers; In case the result from execution is over the nominalsecurity granted under the fiduciary agreement, then the fiduciarygrantee must return the difference to the fiduciary grantor and if theresult is not enough to pay the debt. However, where the incomefrom the sale is insufficient to cover the outstanding debt then theliability is not expunged until such time as the remaining debt isfinalized to the mutual satisfaction of the parties.9. Criminal Provisions Even though fiduciary is deemed to be a private matter, thegovernment has enacted legislation to strengthen fiduciary188 Indonesian Legal System
  • Business Lawinstitutions, as well as to regulate individual and social morality andto prevent parties from acting without the requisite goodwill criticalto successful fiduciary transactions irrespective of whether theyparties are individuals or corporations. The Fiduciary Security lawprovides for the imposition of criminal penalties including terms ofimprisonment of between 1 and 5 years and fines ranging betweenIDR 10 and IDR 100 million.G. LABOR LAW A major change towards global production, concentration ofcapital under transnational corporations, and improved mobility ofconsumer goods, services, and capital brings about the arrival of anew international division of labor. The structure of the globaleconomy has been transformed, linked to a loss of control overnational economies by governments in favor of transnationalfinancial conglomerates and international financial institutions.Given the fact that there is a relatively abundant and less skilledlabor force, it is not surprising that most of the developing countriesincreasingly compete in providing the sites and workforces forindustries which manufacture goods for the world market. Deyostated that in most of the developing countries, a generalobservation is that occupations are characterized by low skill, lowwages, job insecurity, lack of career mobility, extreme politicalsubordination, and government policy which focused on industrialstability (repression) as an advantage to increase foreign directinvestment. These occupations also tend to be associated with highlevels of job turn-over, low work commitment, tenuous socialbonds, the subordination of politics in labor conflict/militancy, andweak bargaining power position. Accumulated with the creation ofsuch a global market, there are conflicting interests of nationalgovernments whether to attract foreign direct investments byIndonesian Legal System 189
  • Business Lawaddressing more pro-business policies, or to maintain protectiveregulations for labor whose bargaining power appears potentiallyweakened by the emergence of a surplus labor force on a worldscale. Indonesia has a quite unique labor market scheme whichincludes both formal-modern and informal-traditional sectors.Practically, the same as many developing countries, such a dualisticscheme is characterized by a small modern sector with a largertraditional sector and the persistent movement of the massivesurplus labor force from the traditional to the modern sector.However, the slow increase of the modern sector tends to stickworkers at relatively constant wages as compared to wage-inflation.The government is challenged to balance its policies so that thedevelopment of the modern sector does not impede employmentcreation in the sector. The focus of government regulations untilnow has been on protections that support modern sector issues, andas such contributes a relatively small percentage to the total nationalemployment level. Accompanying the downfall of President Soeharto’sadministration, the new government’s decentralization policy hasallowed an atmosphere of democratization to develop that hasinfluenced the regulation of workers’ rights and standards. Thisleads to heated discussions on industrial relations, labor protection,as well as labor dispute issues. The Indonesian industrial relations system has developedslowly but surely. Recently, the Government ratified 8 ILO coreconventions whilst removing strict guidelines for unionrepresentation and collective bargaining. Consequently, there hasbeen an explosion in the numbers of trade unions being declaredand they have tended to range across the political spectrum, fromconservative pro-employer trade unions, to moderates onlyconcerned with collective bargaining and workplace reforms, toradicals and revolutionaries who want both political and socialchange (La Botz, 2001). Aside from the new trade union law that190 Indonesian Legal System
  • Business Lawendorses the implementation of a multiple union system at the plantlevel, the government also advocates the interest of employers’ tomaintain industrial stability by granting the exclusive or preferentialbargaining right merely to the majority union. It is worth noting thatthis limitation is common practice in most developing countries. Regarding strikes and lock-outs, the latest regulationexplicitly states that those are basic rights to promote and to protectboth employer’s and worker’s interests. A strike is legitimate andtherefore should be permitted after prior notice to the local laboroffice and employer has been furnished. Another requirement to befulfilled is that the strike should be conducted peacefully. Thecommon reason for workers to go on strikes is a stalled, locked, orfrustrated bargaining process. The new law also mandates thatstriking workers are to be paid continuously during any such action,unless one party brings the case to mediation or arbitration. Incontrast to some other developing nations labor laws, Indonesiaexpressly prohibits the replacement of striking labor with any typeof contract labor. Bipartite institutions have played an important role as aconsultative and social dialog mechanism concerning welfare andworking conditions. It differs from collective bargaining since itfocuses more on information sharing, discussion, and exploration ofoptions. Another breakthrough in the industrial setting is theintroduction of co-determination institutions. The work council isnot only seen as a forum dealing with workplace issues, but is alsoseen as a body whose members should work in a cooperativemanner. The second issue covers policies with regard to minimumwages, overtime, severance payments, paid leave, paid annualholidays (such as Christmas or Idul Fitri bonuses), as well as socialsecurity. As a direct consequence of the on-going decentralizationprocess, the central government has given greater authority toprovincial governments to determine minimum wages as a generalentry level standard. The minimum wage composition consists ofIndonesian Legal System 191
  • Business Lawbase-salary (75%) and regular-financial assistance (25%). Mostdecentralized minimum wage policy has a tendency to reflect theactual Price Consumer Index in a certain province or area. It alsopromotes social dialog between employers and employees, throughmutual negotiation on the subject of non-entry level wages. Thegovernment has its own interest on minimum wages setting becauseit is a means to lessen poverty. In that sense, minimum wages alsoserve as a social safety net. Generally, governments in developingcountries perceive minimum wage setting as a device to achievelow inflation and a low level of unemployment. On the other hand,annual increases of the minimum wage are troublesome as one ofthe consequences is that it supports a demand for higher wages bynon-entry level workers. Considering that Indonesia has not fullyrecovered from the economic crises of 1998 any tacit support forhigher wages is likely to face stiff employer resistance. A basic guideline to calculate overtime rates has also beenprovided by the government. However, provincial governmentsmay modify these rates based on a tripartite consultation. Under the new Ministerial Decree on severance pay and thedispute resolution law, lay offs or dismissals are dependent on quiterigid standards and demand greater compliance from employers.The calculation of severance-pay totals will be based on anindividual worker’s length of service and the reason for his/herdismissal. Practically, such process also takes into account theeconomic condition of the company with respect to the finaldetermination of severance pay due. Nevertheless, the governmentprovides particular mechanisms to delay compliance with the abovementioned standards. The colonial principle of no work/no pay has been revisiteda number of times through particularly the current exceptions to thisprinciple such as maternity leave, two-days leave duringmenstruation, death of an immediate family member, among anumber of others. Bonuses, annual holiday pay, and the 12-days ofannual leave which may be converted into cash have also come192 Indonesian Legal System
  • Business Lawunder scrutiny. The need to improve social security and theprotections that it affords has resulted in the establishment of anational social security system which will be implemented on agradual basis. There are three programs, each conducted separatelyand each with a different target: civil servants, armed forces/policeofficers, and private sector workers. Yet, all programs are designedto protect workers from loss or reduced income caused by economicand social risks such as old age, industrial accidents, sickness,invalidity, unemployment, and other loss of livelihood for reasonsbeyond his/her control. Labor protection is also promoted through occupationalhealth and safety regulations, prohibition against discrimination atwork – especially those regarding sex and race, as well as theabolition of forced and child labor practices. The new labor act hassteadily improved child labor standards through increased minimumage requirements, compulsory basic education programs, limitedline of work and working hours. Furthermore, it also includes quitecomprehensive regulations concerning female workers. While notan essential issue, a restriction on night work for women willpotentially lead to further debates on gender equality in theworkplace. Workers also have a right to rest and leisure, as well asreasonable limitation of working hours as opposed to exploitationpractices. A period of rest offers workers the chance to regainhis/her lost strength, while leisure is aimed to allow workers tocelebrate public holidays. Indonesia has been recognized as the leading exporter ofmigrant labor. The major problem is the fact that most Indonesiansworking overseas enter those labor markets through informalprocedures which means that they are afforded lower levels ofprotection and are often illegal migrants in the country ofdestination. The government has increasingly engaged in bilateralagreements to protect its migrant workers but much remains to bedone. Improved regulatory standards and supervision systems havealso been developed and implemented in order to diminish the roleIndonesian Legal System 193
  • Business Lawof labor brokers at all levels and steps of a migrant workers’departure or repatriation to Indonesia. With the enactment of the new Labor Law, industrialdisputes are classified into four categories: opposing interests,legitimate rights, dismissals, and disputes among unions. Thosedisputes could be resolved through a mandatory process conductedby the government dispute councils (which are to be replaced by anIndustrial Relations Dispute Settlement Court in early 2006) orvoluntary arbitration. Individual dismissals are submitted to theprovincial dispute councils while mass dismissals and appeals arereferred to the central government dispute council. Final andbinding principles of arbitration are implemented to encourage bothparties to make a realistic offer in order to gain consensus,essentially a win-win solution. The new law stipulates thatdecisions to terminate workers must be based upon some legitimatereason. The introduction of industrial dispute courts as analternative to the existing dispute council has also been initiated.These courts are to be formed in every district across the country.Given the poor standing of both the civil court system and thegovernment dispute council mechanisms, industrial players arequite skeptical that this new alternative can reduce the bulk ofcurrently pending cases. In conclusion, sustained development of Indonesian laborlaw has increasingly focused on workers’ basic rights while at thesame time accommodating employers’ interests. However, intensegovernment involvement and control through protective laborpolicies have been preserved ensuring that the labor market is notnearly as liberal and open as it may become. Law is stillpredominant over bargains and discretionary power of employers. Anew approach that provides greater voluntary accomplishment andmutual consent in regulating worker rights and standards should beendorsed without altering their characteristics.194 Indonesian Legal System
  • Business LawH. COMPETITION LAWThe History of Law No. 5 of 1999 The term competition, and in particular monopoly, hasbecome a common word used in Indonesia, particularly in theperiod know as ‘reformasi’ or reformation that has been a continualpresence in policy discussions of the government. The need for acompetition law arose as a result of the rapid spread of monopolisticbusiness practices that were permeating all levels of business like anepidemic primarily because there was no law to stop these unfairbusiness practices. At that time, there was only one provision in theConstitution that acknowledged competition, Section 33. Section 33states that everything and anything that concerns the lives ofIndonesian citizens, is under government protection. TheConstitution did not really help to alleviate or clarify this boom inmonopolistic practices. Not only was the definition of competitionvague, but people also took the opportunity to exploit the vaguenessof the definition to find alternative interpretations. There appearedto be an explicit link between the vagueness of the definition andthe increase in monopolistic behavior in business dealings. In fact,this condition considerably worsened when combined with the ever-increasing levels of corruption and abuse of power by governmentofficials. A direct consequence of these monopolistic and unfairbusiness practices was that many small and medium enterprises hadto close, while state-owned companies cashed in on themonopolistic practices to generate profits. One of the other mostidentifiable aspects of this type of monopolistic behavior and unfairbusiness practice was a widening and stark gap that had becomevisible between the rich and the poor, as well as rapidly risingunemployment levels which further exacerbated the gap betweenthe haves and the have-nots.Indonesian Legal System 195
  • Business Law Consequently many Indonesians suffered, particularly themiddle and low classes who were required to bear the brunt of thesepractices. It seemed that the government was unaware of thebenefits that competition would provide to its citizens as customersof businesses. Increasing unemployment meant a significantdecrease in disposable income that had traditionally supported thegrowth of Indonesian businesses. Simply, the greater thecompetition the greater the benefits enjoyed by consumers,particularly with respect to fair prices for goods and services.However, it must be noted that the government cannot take part inthe competition, but this does not diminish the government’sresponsibility or obligation to protect its citizens from monopolisticand unfair business practices. Should these conditions be allowed topersist then the most likely outcome is a significant decrease in bothdomestic and foreign investment capital that has traditionallysupported the rapid economic growth that Indonesia and Indonesiancitizens had enjoyed through the 1970s to 1997. Investors havebecome afraid to risk their money in a market that does notguarantee a fair and free market or any degree of legal certainty toprotect their investments or themselves personally. The guarantee issimply given when an investor is able to acknowledge that the legaland regulatory framework affords them the personal as well asprofessional legal protections afforded to all citizens. Thisguarantee includes a tacit understanding that the Government willrefrain from interference in the market, particularly frommanipulation of market and policy mechanisms for personal gain.To ensure that these guarantees were enforceable the realization thatthere was a need for significant legislative reform became apparent,particularly with respect to competition, monopolistic practices, andunfair business competition. The intent to create laws that would regulate competition inIndonesia began to take shape around 1990. It was during this timethat legal scholars, members of various political parties, non-governmental organizations, and certain government institutions196 Indonesian Legal System
  • Business Lawbegan to get together and discuss the possibility of enacting a newlaw. In fact, a number of different groups, including the IndonesianDemocratic Party and the Indonesian Department of Trade(cooperating with the Faculty of Law of the University ofIndonesia), produced a bill encompassing competition laws. Theoriginal draft of the bill was not seen as a serious attempt to addressmonopolistic practices or likely to be enacted. Consequently,corrupt government officials continued to perpetuate themonopolistic and unfair business practices of the past and as a resultthe economy continued to suffer and plummet towards crisis. Therefore, the new government initiated a new regulationthat regulated the framework for competition and unfair businesspractices. The DPR passed Law No. 5 of 1999 on the Prohibition ofMonopolistic Practices and Unfair Business Competition (“Law No.5/1999” or the “Anti-Monopoly Law”) on 5 March 1999. Theprimary objectives of this law were to improve the efficiency of thenational economy in order to reach the desired levels of nationalprosperity, to create an environment conducive for business, to stopmonopolistic and unfair trade practices, and to create both efficacyand efficiency in business. At the same time, Law No. 5/1999 was a means to ensurethat the conditions that Indonesia had agreed to in the Letter ofIntent entered by the Indonesian government and the InternationalMonetary Fund in July 1998 were fulfilled. This law was passed bythe DPR on 18 February 1999, and was signed into law by thePresident on 5 March 1999. The provisions of the law required that1 year was to pass before the law became effective and therefore theAnti-Monopoly Law came into force on 5 March 2000. The purposeof this delay was to provide a opportunity to socialize the lawwithin the business community as a means of ensuring maximumcompliance to the new provisions. Moreover, businesses were givenan additional six-month grace period through 5 September 2000, tocomply with the law. This grace period was included to ensure thatbusinesses, the public, and others were aware if the significantIndonesian Legal System 197
  • Business Lawchanges that were to be implemented with respect to doing businessin Indonesia.Law No. 5/1999 The Law includes 11 Chapters and 53 Articles, with themajor substantive law sections covering issues of prohibitedagreements, prohibited activities, abuse of dominant position,exceptions, the creation of the Commission for the Supervision ofBusiness Competition (the “KPPU”) and applicable sanctions. Prohibited agreements cover issues of oligopoly, pricefixing, price discrimination, predatory pricing (by agreement withcompetitors), resale price maintenance, market division, groupboycotts, cartels, trusts, vertical integration, exclusive dealingsconcerning re-supply, tying, reciprocal dealing, and agreementswith foreign parties that may result in monopolistic practices orunfair business competition. The prohibited activities set forth in the law cover matterssuch as monopoly (Article 17), monopsony, market control,predatory pricing (unilaterally), determining production and othercosts, conspiracies to rig bids, obtaining competitors businesssecrets, and impeding the production and marketing of acompetitors products. The Law also prohibits what is known as theabuse of dominant position which is categorized into interlockingdirectorates, cross-share holdings, mergers & acquisitions that mayresult in monopolistic or unfair business practices. This section ofthe law also stipulates the obligations of businesses to providenotice to the KPPU when a business activity such as a merger is tobe executed. Article 50 provides exemptions for certain activities such asagreements intended to implement applicable laws and regulations,intellectual property, standard setting, joint ventures for researchand development, international agreements ratified by the198 Indonesian Legal System
  • Business Lawgovernment, export agreements, activities of small-scaleenterprises, and activities of cooperatives aimed at serving theirmembers. There is also exceptions for state action, defined asactivities carried out by a state-owned enterprise or institutionformed or appointed by the government allowing for the creation ofa monopoly. Another important element of the Law is the establishmentof the Commission for the Supervision of Business Competition orthe KPPU. The KPPU is the body responsible for the enforcementof the Anti-Monopoly Law. This authority and power is derivedfrom Articles 30-37. The Anti-Monopoly Law also sets out theprocedures and methods applicable to the KPPU including thepower and authority to issue sanctions for any proven breach of theLaw. Consequently, any alleged or reported breach of the Anti-Monopoly Law is to be heard by the KPPU and the results of theinvestigative process are to be announced publicly to reinforcepublic confidence in the accountability and transparency of theKPPU.The Commission for the Supervision of Business Competition The KPPU commenced operations in June 2000 after theappointment of Commissioners pursuant to the conditions containedwithin Articles 30-37 of the Anti-Monopoly Law and PresidentialDecree No. 75 of 1999. The KPPU constitutes Indonesias first trulyindependent regulatory commission, as it is not a branch ofgovernment and the government is strictly prohibited from intrudingon the independence of the KPPU. The KPPU has three majorfunctions; namely, law enforcement, policy advice, and publiccompliance through education of the community. The first aspect,law enforcement, deals with the methods used by the KPPU toinvestigate, interpret and enforce the Law. Second, the KPPU isrequired to assist the government in the development of competitionpolicy through submissions on the interpretation of the law so as toIndonesian Legal System 199
  • Business Lawensure that government policy is indicative of a prohibition onmonopolistic practices and supportive of fair and healthy businesspractices. Finally, the KPPU has an obligation to assist businessesand the public in understanding the provisions of the law so that fullpublic and government compliance is achieved. The KPPU is responsible to the nation, the president, theDPR, the judiciary, and the public. The KPPU must report to theDPR all matters relating to the appointment and dismissal ofmembers as well as all budget related requirements. The KPPUalthough not directly related to the judiciary it is important to notethat decisions of the KPPU may be appealed to the General Courtsystem as a means of appellate review. To ensure accountability andtransparency in the decision making processes of the KPPU, theKPPU is required to announce all decisions publicly. The KPPU comprises of Commissioners and a Secretariat.The Secretariat comprises of four Directorates and includesprofessional staff. There are 11 Commissioners appointed to theKPPU, each of whom have met the requisite experience andexpertise conditions. An important element of the selectionprocedure for Commissioners is to ensure that a candidate does nothave any affiliations with any business entity. Commissioners servea 5-year term and can be reappointed for another five year term.Commissioners have equal authority and KPPU decisions aremajority decisions. The Chairperson and Vice-Chairperson areelected by and from among the Commissioners and serve for a 1-year term. There are four Directorates in the Secretariat; namely, theDirectorate for Investigation and Law Enforcement – responsiblefor investigating any violations of the Anti-Monopoly Law andlitigating cases before the courts; the Directorate forCommunication – responsible for disseminating information tobusinesses, the public, and the press; the Directorate for Researchand Training – responsible for training professional staff andproviding research in support of cases under investigation and the200 Indonesian Legal System
  • Business Lawcompetition advocacy program; and the Directorate for GeneralAffairs – responsible for administration, finance, and personnel. The procedure to commence an action at the KPPU requiresthe submission of a written report stating the alleged breach of theAnti-Monopoly Law. However, the KPPU may initiate aninvestigation without a report being lodged if it becomes aware of abreach of the Law that has not yet been reported. Anyone who isaware of a violation or is the injured party can make a report byrevealing his or her identity. Although it is not expressly stated inthe Law there is an element of whistleblower protectionincorporated in the provisions that allow the KPPU to suppress theidentity of any witnesses that it may call in the course of aninvestigation. Once a report has been received and accepted by theKPPU, then the KPPU must have commenced a preliminaryinvestigation and made a determination as to whether there aresufficient grounds to proceed with an additional more detailedinvestigation of the alleged breach within 30 days. In the event thatthe KPPU considers additional investigation is warranted then theKPPU should commence this detailed investigation of the allegedbreach. Any and all information that comes into the possession ofthe KPPU during the course of its investigation must be handledwith appropriate care to ensure that all trade secrets are protected.Where the KPPU deems it necessary it may hear testimony fromwitnesses, experts, or any person considered to be able to assist inresolving the alleged breach of the Law. All investigations undertaken by the KPPU must be formaland as such comply with the strict stipulations contained in the Law.The KPPU maintains the power and authority to call any party toprovide evidence to determine the validity of any report andwitnesses and experts called are required to assist to the fullestextent possible within the boundaries of the prevailing laws andregulations. Any attempt by witnesses or experts to delay orobstruct the process may be subject to sanction thereforeIndonesian Legal System 201
  • Business Lawcompliance is encouraged to ensure that these sanctions are notimposed on the relevant parties. The permissible evidentiary tools available to the KPPU inthe investigation process include: witness testimony, experttestimony, written documents or letters, and explanations fromrelevant parties. Any additional investigation that follows apreliminary investigation must be completed within 60 days. Anextension of 30 days to this initial period is possible and will bebased on reasonable necessity grounds. Essentially, these groundswill be the need for additional time to successfully complete theinvestigation. Once the investigation is completed the KPPU mustissue a decision that states whether a breach of the Anti-monopolyLaw has occurred or not. On reaching a decision on the matter theKPPU is required to read this decision in an open session, in effect apublic announcement, to ensure transparency and accountability ofthe KPPU. In the event that there is no objection to the decision of theKPPU, then the decision is held to be legally binding and an orderof execution will be issued by the District Court to effect judgment.In the event that one of the parties wishes to appeal the decision ofthe KPPU, then that party must lodge an appeal to the District Courtwith 14 days of the decision being issued. If there is no appeallodged within the permissible time period then the decision isdeemed to be accepted by all the relevant parties. In the event thatan appeal is submitted to the District Court, then the District Courthas 14 days to examine the appeal and it must hand down itsdecision within 30 days of the initial examination commencing.Once the decision has been handed down by the District Court if theparties are still not satisfied, then an appeal in the form of cassationcan be made to the Supreme Court. The Law provides the KPPU with remedial powers,including civil remedies (Article 47) to declare unlawful agreementsnull and void; require restructuring of firms guilty of illegal verticalintegration; issue cease and desist orders to stop activities causing202 Indonesian Legal System
  • Business Lawmonopolistic practices or unfair business competition or the abuseof dominant position; cancel mergers or consolidations in violationof the law; order compensation for damages by violators to injuredparties; impose civil fines up to IDR 25 billion (approximately USD2.5 million) for any proven violations of the law. The KPPU canalso send matters to the police for further investigation. Thisadditional investigation may result in criminal penalties beingimposed on the parties for the violations set out in Article 48. In theevent that the police investigation results in charges being laid foralleged breaches of the Law then the responsible parties are liablefor fines up to a maximum of IDR 100 billion (approximately USD10 million) and terms of imprisonment of up to six months.I. CONSUMER PROTECTION LAW In Indonesia, consumer protection is relatively new.Parliament enacted the Consumer Protection Law No. 8 of 1999(CPL) on 20 April 1999. This law enables consumers, who havesustained any injuries caused by a dangerous product and/or service,to take legal measures against the business operators responsible.Definition of Consumer, Business Operator, Goods and/orServices The CPL defines a consumer as any natural person whouses goods and/or services available in the market, either for selfinterest, family interest, others, or other living creatures that can notbe used for resale (Article 1(2)). In other words, only end-consumers are protected in Indonesia. Meanwhile, a businessoperator is defined as any natural or legal person who, either in theform of a legal entity or some other business form, was establishedIndonesian Legal System 203
  • Business Lawand domiciled or does business within the jurisdiction of theRepublic of Indonesia, either by his own or together, under acontract in the field of economics (Article 1(3)). According to the CPL, the definition of goods is anythingthat is either tangible or intangible, moveable or immoveable, thatcan be exhausted (dapat dihabiskan) or not, which can be sold,used, and consumed. A service is defined as a service either in theform of a job (pekerjaan) or as a result (prestasi) which is providedto the community to be used by consumers.Consumers’ Rights and Obligations Article 4 of the CPL states the rights of consumers:a. a Right of comfort, security, and safety in the consumption of goods and/or services;b. a Right to choose goods and/or services and to get those goods and/or services at the proper price and in the condition that the goods and/or services were promised.c. a Right of true, precise, and honest information on the condition of the goods and/or services;d. a Right to be heard, whether an opinion or objection (keluhannya), to the goods and/or services used;e. a Right to seek legal aide assistance during a consumer protection dispute;f. a Right to get guidance and education.g. a Right to be treated or served in a proper and non-discriminate manner.h. a Right to get compensation, redress and/or a replacement if the goods and/or services received were not as promised in the agreement or were unfit for purpose.204 Indonesian Legal System
  • Business Lawi. any other rights granted under any other prevailing laws and regulations. Under Article 5 of the CPL, consumers also have obligations:a. To read and follow the instructions and procedures to use or make use of the goods and/or services for security and safety.b. Act in good faith during the purchase transaction of any goods and/or services;c. To pay the agreed price;d. To participate in any consumer protection legal dispute in accordance with the prevailing laws and regulations.Business Operator’s Rights and Obligations Business operators’ rights are regulated in Article 6 of theCPL:a. a Right to receive payment pursuant to the terms and conditions of the agreement and to refund and exchange goods and/or services;b. a Right to legal protection from consumers acting in bad faith;c. a Right to submit a proper defense in any consumer protection dispute matter;d. a Right to rehabilitation of the good name and reputation if the damage is legally proved not to be the fault of the business operator or of the goods and/or services sold;e. any other rights granted in any other prevailing laws and regulations. A business operator under Article 7 of the CPL has thefollowing rights:a. To conduct business in good faith;Indonesian Legal System 205
  • Business Lawb. To supply true, correct, clear and honest information on the condition and guarantee the goods and/or services as well as provide instruction on the use, repair, and maintenance of the goods and/or services;c. To treat or serve consumers in a proper and non-discriminate fashion.d. To guarantee the quality of the goods and/or services produced or sold in accordance with the standard provisions of any prevailing laws and regulations with respect to the quality of goods and/or services sold;e. To provide consumers a chance to test and/or try certain goods and/or services and to give any necessary guarantee on the product made or sold in the market;f. To provide compensation, redress and/or replacement for any injury or damages as a result of consuming, using, and making use of the goods and/or services sold;g. To provide compensation, redress and/or replacement for any injury or damages if the received or used goods and/or services were not in accordance with the terms and conditions of the agreement. The CPL in Chapter IV, Articles 8-17 prohibits businessoperators from certain conduct such as producing and selling goodsand/or services that are unfit for purpose based on prevailing qualitystandards regulations; selling defective or used goods withoutproviding full and frank disclosure on the condition of the goodsand/or services; offering, promoting, or advertising goods and/orservices under a false pretense; promoting goods and/or services byway of either incorrect statements or misleading information; usingstandard contracts where location and form are not readilyidentifiable or can not be seen clearly, or if its statement cannot beunderstood and if it prohibits other conduct.206 Indonesian Legal System
  • Business LawBusiness Operator’s Liability & Product Liability in Indonesia Indonesia does not currently have specific product liabilitylegislation that addresses the legal liability of manufacturers andsellers to compensate users and consumers for injury or damagesuffered after consuming a defective product. Although the CPLdoes address the matter however traditional legal concepts of privityof contract and fault-based theories of producer liability are stillapplied. As a consequence of the type of legal system utilized inIndonesia it is fair to say that product liability-related jurisprudenceis not yet highly developed. Litigation in Indonesia generally isviewed as being counter to the social and cultural characteristics ofthe community and the State that prides itself on the resolution ofdisputes through discussion and the achieving ultimately of aconsensus. It is these social norms in Indonesian society that tend todiscourage litigation in favor of discussion leading to consensus andthis is evidenced in the small number of claims that ever make it tocourt. Product Liability in Indonesia is known as a liability ondefective goods (“tanggung jawab produk cacat”). This kind ofliability is a result of the circumstances of a product, good, orservice, which puts the burden of product liability on the producersor manufacturers. This liability, therefore, puts the stress on thedefectiveness of the product that caused injury to people, otherpeople, or other goods. Even though the CPL does not provide a specific definitionfor a defective good, nevertheless, it can be assumed to mean:“every product which cannot fulfill the objective of its manufactureeither intentionally or negligently as a result of the process ofproduction or any other thing that happens in the distributionprocess, or by not providing the safety requirements for people ortheir property in using it, as people would expect it to be used.” In Indonesia, there are three causes of action that consumerscan use to file a product liability civil action: negligence, breach ofIndonesian Legal System 207
  • Business Lawcontract, and tort. Nonetheless, business operators in Indonesia canalso be brought to the court for their alleged criminal liability foreither public health or security reasons. Under Article 62, businessoperators that violate the provisions in the CPL can be imprisonedfor a maximum term of 5 (five) years or a fine of IDR 2 billion.Negligence In the CPL there are three provisions that govern productliability; namely, Articles 19, 23 and 28. Article 19 deals withliability of a producer, in which case the producer should providecompensation for damage, pollution and/or the consumer’s financialloss as a result of consuming the goods or services that wereproduced or sold (Art. 19(1)). Compensation can be in the form ofthe return of money, replacement of the goods or services, or theprovision of treatment to injury or providing compensation inaccordance with the prevailing laws and regulations. Compensationmust be given within seven days of the date of transaction.Nevertheless, compensation does not eliminate criminal liability,once fault has been established (Article 19(4)). However, it is also possible that a producer may avoidcompensating the consumer if the producer is able to prove that theinjuries, damage, or other loss was caused by the consumerthemselves and not by the good or service. However, if the producercannot prove this and he refuses to compensate the consumerpursuant to Article 19, the consumer can take legal action (“sue”)against the producer by going through the Consumers DisputeSettlement Body (Badan Penyelesaian Sengketa Konsumen) underArticle 23. Under Article 19, the consumer has the right to restitution if itcan be proven that negligence occurred. If negligence can be provenand the business operator and or producer refuses to compensate theconsumer within seven days of the date of transaction, Article 23208 Indonesian Legal System
  • Business Lawallows the consumer to take the business operator or producer eitherto court or through the Consumers Dispute Settlement Body The CPL shifts the burden of proof to the producer, in thesense that the producer must prove that there was no negligence.Therefore, product liability, according to the CPL, is a negligenceaction that at the same time modifying the burden of proof to theproducer.Breach of contract Under the provisions of Article 1243 of the Civil Code,consumers who have sustained injury or damage can sue the sellersor manufacturers due to a breach of contract. This provision arguesthat the seller or manufacturer failed to uphold their end of thecontract, thus the plaintiff should be entitled payment for costs,damages, and interest arising from the breach of contract. However,if the sellers or manufacturers can prove that their defect wascaused by something unforeseeable for which they cannot be heldaccountable, then they are not held liable for the damages orinjuries, assuming that they are not acting in bad faith. Furthermore,they do not need not pay for damages due to force majeure or bysome unintentional occurrence, or if they were prevented fromperforming the contract. Under the breach of contract theory,consumers can only prevail if they are able to prove damageoccurred and that the business operator or producer was aware ofthe defect at the time the contract was entered. The Civil Code also states that sellers are obliged to ensurethat the goods they sell are free from hidden defects. In other words,if the defects are known to the consumer, then the consumer eitherwould not have purchased the goods or services or would havepurchased it at a reduced price. Sellers are not obligated to informconsumers about visible defects in which buyers can conceivablydiscover for themselves. Therefore, it can be said that a breach ofcontract includes a breach of warranty by the producer. Since theIndonesian Legal System 209
  • Business Lawcontract is between the producer and consumers, only consumerscan bring about this course of action. The key of this theory isdependent upon the privity of contract.Tort Liability Tort Law (“perbuatan melawan hukum”), also known as an“open” clause, is one of the theories available for a product liabilityaction in Indonesia. Article 1365 of the Civil Code provides thelegal foundation under Indonesia law for all tort actions byconsumers who were injured by a defective product. Under thisprovision, it is mandatory for the person who inflicts damage uponanother to compensate the victim. Furthermore, Article 1366 statesthat each and every person is responsible for the damage that theycause due to their negligence or carelessness. Therefore, to be able to bring a tort claim for product liability,consumers have to provide evidence which proves that the producerwas negligent (at fault), the action of the producer was an unlawfulact, the consumers suffered damage, and there is a causalrelationship between the tort in question and the injury or damagethe victim suffered. Product liability in Indonesia is based upon fault, in otherwords, consumers can only bring a product liability claim if onlythe producer is at fault. Under the theories of breach of contract andtort liability, the burden of proof is on the plaintiff, while under thenegligence theory, laid out by the CPL, the burden of proof is on theproducer. Unlike the US, which imposes the concept of “strictliability” with respect to tort claims, Indonesia only prescribes apresumption of negligence or a presumption of liability in which theproducer can rebut the presumption if they can proof that they werenot at fault. Hence, the principle of product liability in Indonesia isstill at least one step behind the principle of strict liability.210 Indonesian Legal System
  • Business LawConsumer Dispute Settlement Mechanism A consumer dispute is basically a dispute betweenbusiness operators and consumers who demand redress as a result ofalleged damage, pollution, or other suffering in the consumption orthe usage of goods or services. There are 3 mechanisms in whichconsumers can settle their dispute with business operators: throughthe Consumer Dispute Resolution Body, litigation, or an approvedADR mechanism.Consumer Dispute Resolution Body (Badan PenyelesaianSengketa Konsumen) The Consumer Dispute Resolution Body (“BadanPenyelesaian Sengketa Konsumen” or “BPSK”) acts as an out ofcourt consumer dispute mechanism. All consumers who sufferdamage can sue the producer, manufacturer, or seller through thisbody instead of through the general court system. In some aspects,this new body is basically similar to a small claims court becausethe procedures involved are simple, informal, and inexpensive. If aconsumer decides to go through the Consumer Dispute ResolutionBody, it is the consumer’s choice if legal aide is wanted. Anyconsumer who wants their dispute settled by the BPSK has to file awritten or oral complaint on settlement of the dispute through thesecretariat of the BPSK, who in turn will then establish a committeethat will consist of three people that represent the three elements ofthe BPSK (government, consumer, and business operators). Thiscommittee will settle the consumer dispute through conciliation,mediation or arbitration, whichever the parties decide. All consumer disputes using the aforementionedmechanisms have to reach a settlement at least twenty-one daysfrom the day the complaint was received by the BPSK secretariat.The decision from the BPSK is final and binding, however, eachparty can appeal the decision which would lead to a trial withinfourteen days of the decision being delivered to all the relevantIndonesian Legal System 211
  • Business Lawparties. During the trial, the court has to hand down its decisionwithin twenty-one days. If either of the parties are still unsatisfiedwith the verdict, the decision may be appealed to the Supreme Courtwithin fourteen days of the decision of the trial court. The SupremeCourt has to hand down its decision no later than thirty days afterthe petition is filed. In conclusion, a consumer dispute thatcommences in the BPSK and is finally resolved in the SupremeCourt may take up to 100 days.Litigation (In Court) Process Every suffering consumer can submit their complaint to therelevant District Court in an attempt to resolve their dispute with thebusiness operator. Any complaint by a consumer on the conduct ofa business operator that is alleged to have breached the CPL can befiled by the relevant consumer or their heirs; a group of consumerswith the same or similar complaint with respect to the same productor service in the form of a class action; by a consumer protectiongroup (Consumer Protection NGO) or by the Government or anyother related institution in the event that the good or service inquestion resulted in huge material loses and assessable damages orthere were a significant number of consumers who were affected bythe breach. The procedures noted in this mechanism refer to theprocedural processes of the General Courts.Out of Court Settlement Mechanisms An out of court consumer dispute settlement occurs whenthe relevant parties desire to resolve the matter with respect to theamount of compensation or other reparation regarding the allegedbreach of the law to guarantee that the consumer is protected fromfurther harm and compensated for the harm already suffered. Theformat used is known as Alternative Dispute Resolution (“ADR”).An important provision that must be considered is Article 45(3).212 Indonesian Legal System
  • Business LawThis Article states that any out of court consumer protection disputeamicably settled between the parties does not void any criminalliability that may be incurred as a result of the conduct. Finally,parties that elect to attempt an out of court settlement may onlyreturn to the court to confirm their agreement. In the event theparties fail to reach a mutually acceptable agreement may theparties re-enter a court administered litigation action.J. TAXATION The foundation of Tax Law in Indonesia is the Constitution,particularly Article 23A, which states, “Tax and other levies whichare characterized as compulsory for the needs of State are to beregulated by law”. Since Indonesia gained independence in 1945,Indonesia has recognized two primary terms in taxation law;namely, tax and fiscal. There has been no agreement, particularlyamong the experts, on the difference between these two termshowever there has been no shortage of possible interpretations.Several experts have stated that tax is a non-compulsorycontribution from the individual or organization to the governmentto defray the expenses incurred in the common interest of allcitizens without reference to any special benefits conferred byregulation. Fiscal, on the other hand is defined by Soemitro as anyform of government action to receive contributions from theirpeople for particular purposes and to be used exclusively at certaintimes for the purpose for which the fiscal was levied. There are 3 basic categories of taxes in Indonesia; namely,National taxes, Regional taxes, and custom (duties and excise)taxes. National Taxes include income tax, value added tax, sales taxon luxury goods, land and building tax, and the fiscal departure tax.Regional Taxes include development tax, motor vehicle tax, andother relatively minor taxes. Customs Taxes include import duties,Indonesian Legal System 213
  • Business Lawexport tax, and taxes on certain commodities such as tobacco,alcohol, sugar, and gasoline. The Indonesian Government is currently undertaking asignificant amount of tax reform, particularly through amendmentsto current legislation and the enactment of new legislation. Theprimary aim of these reforms is to provide taxpayers with increasedfairness and greater levels of legal certainty with respect to theirrights and obligations under the tax law. Furthermore, it is expectedthat these reforms will provide more clarity and simplicity in bothprocedural and technical matters. Interestingly, the reform packagealso introduces the possibility of self-assessment with respect to tax.The Government has recently confirmed the Tax Policy Blue Printwhich sets out the Government’s tax policy and strategy for thedecade from 2001 through to 2010. The proposed tax reformprogram has already commenced with some of these amendmentscoming into force as of 1 January 2001. The Directorate General ofTaxation was responsible for drafting several amendments to threeearlier tax laws, namely: Law 16 of 2000 on General TaxationArrangements and Procedures; Law 17 of 2000 on Income Tax;and, Law 18 of 2000 on Value-Added Tax on Goods and Servicesand Luxury Sales Tax. The amendments include revisions to taxbrackets and a number of measures designed to improve taxpayercompliance. The current prevailing tax legislation restricts theDirectorate to making a request to the National Police Force toarrest delinquent taxpayers or individuals alleged to have breachedany other tax law or regulation.Income Tax The basic principles of Indonesias Income Tax law apply tobusinesses and individuals alike. Taxable income is defined as anyincrease in economic prosperity received or accrued by a taxpayer,whether originating from within or from outside the Republic ofIndonesia that may be used for consumption or to increase the214 Indonesian Legal System
  • Business Lawrecipient’s wealth in whatever name or form. It includes anyremuneration in connection with work or services, business profits(with no distinction between operating and capital income),dividends, interest, rent, royalties and other income related to theuse of property. The current tax bracket system stipulates 3 brackets with amaximum tax rate of 30% applied to individuals or businesses withtaxable income above IDR 50 million. Generally, taxation is self-assessed which has traditionally allowed for significant levels of taxavoidance to occur. To counter this, there is an extensive system ofdomestic withholding taxes to ensure regular and early collection ofincome tax. The withholding tax system includes severe penaltiesfor non-compliance. In addition to the 3 brackets noted above thereare special tax brackets for specific types of businesses such aspetroleum companies, mining companies, geothermal powercompanies, foreign drilling companies, and non-residentinternational shipping and airline companies. Taxable income is determined by subtracting allowabledeductions from revenue. Certain expenses, such as employeebenefits in kind and donations, are generally not tax deductible. Inaddition, interest incurred to finance the acquisition of shares is notdeductible unless dividends from the shares purchased are taxable.As a general rule, taxpayers may deduct from gross income allexpenses related to earning, securing, and collecting taxableincome. Items that are not deductible include those incurred for thepersonal benefit of shareholders; benefits in kind (housing andvehicles) provided to employees, except for the provision of foodand beverages for all employees, and for certain benefits in kindprovided to employees in certain remote areas (including gifts,donations and support); “excessive” payments for goods or serviceswhere a special relationship is deemed to exist between the buyerand seller; and, expenses incurred in the course of producingincome that is exempt from tax or subject to final tax. Formation ofa reserve or allowance is generally not tax deductible, with theIndonesian Legal System 215
  • Business Lawexception of bad debt allowances for banks or finance leasingcompanies, reserves in insurance companies, and reserves forreclamation costs in the mining industry. Taxable Income for individuals includes virtually any"increase in economic benefit" received by a taxpayer includingwages, profits, prizes, gifts, and capital gains. Tax residents aretaxed on world-wide income (whether or not remitted toIndonesia), although the tax authorities still lack the resources toeffectively monitor and enforce full compliance where offshoreincome is involved. In Corporate Tax most Indonesian companies adopt thecalendar year as their financial and tax year, however under specialcircumstances substituted accounting periods are available. Acorporation, for tax purposes, is classified as “resident” or “non-resident”. Residency is determined on the basis of place ofincorporation. A corporation is therefore considered “resident” ifincorporated in Indonesia and non-resident if otherwise. Residentcorporations are taxed on their worldwide income. Tax credits areallowed for income that was taxed outside the country. Non-residents are taxed only on income derived from Indonesiansources, subject to any relief available under double taxationagreements. However, a non-resident entity with a permanentestablishment (“PE”) in Indonesia, such as a branch office, is taxedon (1) the PE’s income from its business or activities, and from theassets it owns and controls; (2) the income of the head office arisingfrom business activities, or sales of goods or services in Indonesiaof the same type as those sold by the permanent establishment inIndonesia; and (3) all other income, either received or accrued bythe head office such as dividends, interest, royalties, rent and otherincome connected with the use of property, fees for services, etc,provided that the property or activities producing the income iseffectively connected with the PE in Indonesia. Income attributableto a PE of a company that is resident of a treaty country should referto the relevant treaty.216 Indonesian Legal System
  • Business Law In Indonesia a PE is generally defined as an operation inwhich a non-resident establishes a fixed place of business inIndonesia. This would include a management location, a branchoffice, and an office building, among others. A PE can also beestablished as a result of the non-resident entity’s employeesproviding services in Indonesia for more than 60 days in any 12-months period. For companies from those countries with whichIndonesia has concluded a Double Tax Agreement (“DTA”), therelevant definition can be somewhat modified. Expenses such as those for research and developmentcarried out in Indonesia and eligible employee training qualify asregular allowable deductions. Indonesia has no special income taxdeductions/relief for research and development and eligibleemployee training. The deductibility of research and developmentperformed offshore remains unclear. There is taxation of other particular forms of income, suchas:Dividends – withholding tax applies to dividends paid byIndonesian corporations. An important exception is domestic inter-corporate dividends, provided that the dividend is from the retainedearnings, the shareholding of the recipient is at least 25%, and therecipient maintains other active businesses. If the recipient is aresident individual or non-corporate entity, the rate is 15% andrepresents an advance against the taxpayers annual income tax.Interests – interest paid by resident borrowers to resident banks orfinancial institutions is exempt from tax. Interest paid to offshorelenders is subject to 20% withholding tax (subject to applicable taxtreaty).Royalties – if the royalty recipient is a resident taxpayer, tax iswithheld at the rate of 15%. If the recipient is a non- resident, tax iswithheld at the rate of 20% (subject to applicable tax treaty).Indonesian Legal System 217
  • Business LawCapital Gains – capital gains are generally taxable as ordinaryincome and capital losses are tax deductible. Special rules apply forpublicly traded shares.Value Added Tax (VAT) VAT is imposed upon the delivery of most categories ofgoods and services within Indonesia. The basic VAT rate is 10%.Imports are generally subject to VAT at a rate of 10%, but exportsare effectively exempted from VAT by application of a 0% rate.Undeveloped land transfers do not attract VAT but land preparedfor residential or industrial estate development is subject to a VATof 8%. VAT liability arises at the time of delivery of the goods orservices, or upon receipt of payment, whichever is earlier. As apractical matter, the date of the tax invoice (faktur pajak) is used todetermine when tax liability arises. The taxable individualcorporation must issue the tax invoice no later than the end of themonth following the month of delivery or payment. Monthlyreturns of all taxable purchases and sales must be filed by the 20thof each month. If output VAT is greater than input VAT, the netdifference is payable to the tax office. In practice, payment of taxmay be delayed up to a maximum of 75 days following the day ofdelivery. If input VAT is greater than output VAT, the excess maybe carried over to the following month to offset against that nextmonths output VAT. In principle, the excess of input VAT overoutput VAT may be refund once a year, although actual collectionmay be difficult and/or time consuming. Various means of reducing the burden of VAT have beenintroduced. Deliveries of goods into bond zones are VAT exempt,as are goods and services to foreign aid projects, sales of cattle andpoultry feed, and the import of certain specified goods andservices. Services in certain sectors have been specificallyexempted from VATsuch as services related to medical and healthcare, social welfare activities, banking and insurance, radio and218 Indonesian Legal System
  • Business Lawtelevision broadcasting, telephone and telegram services,educational and religious activities, public transportation, postage,labor supply, and hotel accommodation. Additionally, deferrals ofVAT are available to PMA and PMDN companies on the import ofMaster list equipment, machinery and raw materials used in theproduction process. Presidential Decree No. 37 of 1998 providesfor a VAT exemption on the transfer of capital goods in the form ofmachinery and factory equipment. Under Minister of FinanceDecree No. 615/KMK.O1/1997, production companies may importraw materials free of VAT, Sales Tax on Luxury Goods and importduties, provided that the raw materials are processed and re-exported. Additionally, under the so-called PET facility(Perusahaan Eksportir Tertentu) established by the Minister ofIndustry and Trade and the Minister of Finance, speciallydesignated exporting companies are granted a facility to purchasecertain types of locally sourced basic and auxiliary materials on aVAT free basis.Sales Tax on Luxury Goods Sales Tax on Luxury Goods is imposed at a rate of 10% to50% on a wide range of both imported and local luxury goods.Luxury houses, apartments, condominiums and townhouses aresubject to a 10% Sales Tax on Luxury Goods.Land and Building Tax Land and Building tax is payable annually on land,buildings and permanent structure. The rate is 0.5% of theassessable value, which is set at 20% of the market value of theproperty except for residences with a market value in excess ofIDR 1 billion in which case the assessment is 40% of the marketvalue. The market value, in principle is revised annually. However,the first IDR 8 million per taxpayer is tax-deductible.Indonesian Legal System 219
  • Business Law Special calculation formula applies to plantations, mining,and forestry business. Non-taxable objects are land and buildingsused for religious worship, social affairs, health, national educationand culture, graveyards and archaeological relics, protected forests,nature reserves, tourist forests, national parks, pasture under villagecontrol and other state lands, diplomatic offices and consulates (ona reciprocal basis), and specified international organizations.Fiscal Departure Tax Every Indonesian resident departing Indonesia by air isrequired to pay a IDR 1 million "Fiscal Departure Tax", withlimited exceptions.Development Tax Development Tax is a municipal tax intended to aid thedevelopment of cities. Where applicable, it is levied at the rate of10% on restaurant bills. There is also a tourism development tax ofan extra 2% on the service charge imposed by some hotels andrestaurants.Tax Returns Taxpayers must prepare both monthly and annual returns.Monthly returns must be filed by the 20th day of each month forcorporate tax, employee income tax, and VAT. Annual returns mustbe submitted within three months of the end of the financial year. Accounts and records must be kept in Indonesia,denominated in Rupiah, and composed in Indonesian or a foreignlanguage approved by the Minister of Finance. PMA (foreigninvestment) companies, permanent establishments of foreigncompanies, production sharing contractors, contract of workcompanies, and other entities with foreign affiliations are allowed to220 Indonesian Legal System
  • Business Lawkeep records in English and accounts in US dollars, subject toapproval from the Director General of Tax. PMA companies,permanent establishments, and other entities with foreignaffiliations must obtain this approval at least 3 months before thebeginning of the relevant accounting year or within 3 months of anew taxpayer being established. Production sharing contractors andcontract of work companies must notify the Tax Office in writing atleast one week before US dollar/English bookkeeping is adopted. Ataxpayer who uses English (only) in its bookkeeping has to submitwritten notification to the Tax Office within 3 months after thebeginning of the book year when English bookkeeping commences. Where a tax assessment has been issued, an interest penaltyis chargeable on tax not paid by the due date, calculated from thatdate until it is paid. The rate of interest is 2% per month for amaximum of 24 months. Administrative surcharges levied on underreported tax:1. 50% of the income tax not paid or underpaid in a tax year if a tax return is not filed or not filed within the specified period as stated in the reminder letter issued by the Tax Office.2. 100% of the income tax not withheld or under withheld, not collected or under collected, or not deposited or under deposited.3. 100% of any VAT or sales tax on luxury goods not deposited or under deposited, in certain circumstances. If a taxpayer corrects its own tax return (2-year limit after thetax is due or after the end of tax period or tax year) with the resultthat the tax owed increases, a penalty in the form of 2% interest permonth is applied to the total tax underpayment, calculated from theend of the filing date for the period until the date of payment arisingfrom the corrected tax return. Even though a tax return has beencorrected or the 2-year limit has passed, a taxpayer may declare anerror in the tax return as long as the Tax Office has not issued a taxassessment and the revision results in a higher taxable profit or aIndonesian Legal System 221
  • Business Lawlower tax loss. Any tax underpaid and the administrative surchargeof 50% of the tax underpaid should be paid before the tax return issubmitted. The Indonesian tax system is based on the principle of self-assessment. However, the Tax Office has the right to issue anassessment within a 10-year period ("statute of limitation"), if, afteran audit, it considers that the taxpayer has not self-assessed thecorrect amount or if no tax return has been lodged. However, anassessment can be issued after expiry of the 10-year limitationperiod if the taxpayer has committed a criminal act. The Tax Officeconducts the following types of audits:1. full audits, which should be completed within 2 months, but may be extended to 8 months;2. simple field audits, which should be completed within 1 to 2 months;3. simple office audits, which should be completed within 4 to 6 weeks;4. If any transfer pricing issues are identified, the tax audit may be extended up to 2 years, although this does not apply if the taxpayer requests a refund. An additional tax assessment letter may be issued within the10-year limitation period if new data and/or data previouslyundisclosed is discovered shows that the tax liability has beenunderstated. An administrative surcharge of 100% is levied on suchadditional assessments. An additional assessment can be issuedafter expiry of the 10-year limitation period if the taxpayer hascommitted a criminal act, in which case an administrative (interest)penalty of 48% is applied to the additional assessment in addition tothe above surcharge. A taxpayer may object to an assessment or anadditional assessment within 3 months of its date of issue. The TaxOffice has one year in which to issue a decision. The Tax Officemay reduce the assessment, confirm it, or even increase it. Failure222 Indonesian Legal System
  • Business Lawto issue a decision means the taxpayers objection is deemed to beaccepted. A taxpayer may submit an application to reduce or canceladministrative penalties on tax assessments (request forreconsideration) to the Tax Office. The application has to beprocessed within 12 months; otherwise the application is deemed tobe accepted.K. BANKRUPTCY LAW Indonesia has had a formal Bankruptcy Law since 1905, whenStaatsblad 1905 No. 217 jis. 1906 No. 348 or FailissementVerordening (hereinafter “FV”) was put into effect. The BankruptcyLaw was then amended with Government Regulation in lieu of Law(Peraturan Pemerintah Pengganti Undang-undang or abbreviatedas “PERPU”) No. 1 of 1998 (hereinafter referred to as “PERPU 1 of1998”). A PERPU can only be enacted by the President and may beenacted without the parliament’s consideration however the subjectmatter of the PERPU must require emergency regulation and cannotbe regulated in any other way. Nevertheless, to ensure that thePresident does not abuse the power of PERPU, a PERPU is requiredto be brought to the parliament at the first available parliamentarysitting to be confirmed or rejected as law. As stated in TAP MPRNo. III of 2000, a PERPU is one rank below a Law. The PERPUpower is regularly the source of debate, particularly with regard towhether an economic crisis can qualifies as a state of emergencythat requires PERPU regulation. At the time the underlying reasonwas the urgency placed on the amendments to be rapidly enacted toensure an IMF loan disbursement. The debate still lingers whetherthe urgency stated equates to a state of emergency necessary for theuse of the PERPU power. Nevertheless, the use of PERPU toIndonesian Legal System 223
  • Business Lawregulate urgent matters does avoid the often long and tediousdebates of the parliament in the immediate term. However, as notedearlier before a PERPU can be enacted as a full law it must bepassed by the parliament in the parliament’s next sitting so theavoidance of debate and public scrutiny is not avoided in the long-term. PERPU 1 of 1998 came into effect on 20 August 1998 and theParliament confirmed the PERPU into Law 120 days later withoutmaking any amendments to Law 4 of 1998. Therefore, Law 4 of1998 refers to the Amendment of the Bankruptcy Law and PERPU1 of 1998 which were incorporated into Law 4 of 1998. Theamended Bankruptcy Law became Law 4 of 1998. The BankruptcyLaw Amendment did not replace the old law but merely addprovisions and amend the provisions of the FV. Furthermore, on2004, the new Bankruptcy Law came into effect, named as Law 37of 2004 on Bankruptcy and Suspension of Debt Payments. This newlaw replaces the previous Bankruptcy Law. As it is said in article307, FV and Law 4 of 1998 are withdrawn and not legally bindinganymore. Therefore, the Bankruptcy Law refers to Law 37 of 2004. The FV has always been an unpopular legal instrument withinthe business community for a number of reasons, particularly thedifficulty of successfully sustaining a bankruptcy claim. This isevidenced by the fact that during the 1980s and 1990s only a smallnumber of bankruptcy petitions were ever successful and involvednominal debt values and usually against sole traders, this has oftenbeen referred to as consumer bankruptcy. Legal entities that hadsignificant asset or debt rarely utilized the bankruptcy law orassociated procedures. Indonesian bankruptcy history shows thatArafat Lyold (Sailing Company) was the only company holdinghuge debt and significant assets that were subject to a businessbankruptcy proceeding. It is worth noting that at that time,voluntary petition was much more common than involuntarypetitions were.224 Indonesian Legal System
  • Business Law Bankruptcy has often been viewed as saviour or destroyer ofbusinesses and business interests however at the beginning of 20thcentury bankruptcy enjoyed somewhat of a revival as businesseswere looking at bankruptcy in a more favorable light. ProfessorSudargo Gautama notes in his book that there were manybankruptcy petitions in civil court at that time. However, as the 20thcentury was ending, the 1990s saw a substantial decline in thenumber of bankruptcy petitions filed in civil court. The primaryreason for this decline was that legal consultants advised theirclients to consider the bankruptcy procedure as a dead option andwhose consequences were not worth any consideration. Since the last revision of Staatsblaad 1906: 348 there has inpractice been no significant change to the substance of thebankruptcy law. This could be viewed as a careless oversight or aconscious minimizing of the value of bankruptcy law however it isclear that the bankruptcy law should at least reflect the current andreal conditions of the business community. In the post-independence period Indonesia experienced a major transformationin business practices and unfortunately it become obvious that theBankruptcy Law was never able to keep pace. The most obvious ofthese deficiencies was the inability of the Bankruptcy Law toprovide protection to creditors from a bad faith debtor. Furthermore,the requirements that must be satisfied prior to filing a bankruptcypetition were extremely onerous and complicated. The FV requiredthe creditors to prove that the debtor was in a discontinued-debt-paying position before a bankruptcy petition could be filed. Clearlythis is difficult as the majority of debtors were still paying theirdebts despite the payments being made never being in the fullamount. These difficulties were only increased by the ineffectivework of the Trust Estate Agency (“Balai Harta Peninggalan”) andthe courts, which often took excessively long periods of time toresolve matters and usually treated the matters as trivialinconveniences delaying other more important matters.Indonesian Legal System 225
  • Business Law The FV is the bankruptcy law inherited from the Dutch thatwas applied during the colonial period. This meant that bankruptcycases were generally dealt with in the general court system andwere treated the same as any other civil case. The Trust EstateAgency, a Government run institution, in essence provides the sameservices and function as the Trustee in the Chapter 7 USBankruptcy Code with respect to the administration of an estate. The previous bankruptcy law, Law 4 of 1998 (also stressedout in Law 37 of 2004 article 300), had established a special courtto handle commercial cases including bankruptcy. This court wassimply named, the Commercial Court. The implementation of theAmended Bankruptcy Law requires further ‘implementingregulations’ to facilitate and ensure compliance with the amendedprovisions. Presidential Decree 97 of 1999 created additionalCommercial Courts in Bandung, Semarang, Surabaya, and Medan.The Commercial Court falls under the jurisdiction of the DistrictCourt, a first instance level court of the Indonesian judiciary, and isconsidered to be a specialized chamber of the relevant DistrictCourt, similar to Human Rights Courts and Children’s Courts.Article 11 of the Bankruptcy Law stated that the new CommercialCourt or ‘Bankruptcy Court’ is intended to be a method of lastresort. Essentially, this requires that all other methods and means ofsatisfying payment have been exhausted and the debtor remainsdelinquent in their obligation to make payment on the relevant debtdespite being in a position to do so or where a debtor hasconsistently negotiated in bad faith with respect to settling anyoutstanding debt obligation. Therefore, it is reasonable to state thatthe underlying premise of the Bankruptcy Law is to forcedelinquent debtors, and who have the means to pay their debts, tonegotiate with their creditors a repayment schedule, or in the case ofthose debtors unable to pay off their debts, to expedite theliquidation of the debtor’s assets. The Bankruptcy Law includesboth the material and procedural elements of law to ensurecompliance with and enforcement of the provisions of the law.226 Indonesian Legal System
  • Business Law Basically, like other bankruptcy system the parties inIndonesian Bankruptcy Law are the debtors and the creditors withthe receiver to assist them in reaching settlement. The BankruptcyLaw introduces two mechanisms to deal with the insolvent debtor.The first mechanism is the petition to declare the debtor bankruptwith the aim of liquidating the assets under Chapter II. Either thedebtor or its creditor(s) can initiate this type of proceeding. Thedebtor under the Bankruptcy Law can be individual as well as ajuridical person (a company, a bank, or any other legal entity thathas legal personality). However, in Article 2 (2), (3), (4), and (5)states there are four other categories that may file a bankruptcypetition: (1) the Office of the Attorney General in the public interest(2) the Indonesian Central Bank if the debtors are banks, (3) theCapital Market Supervisory Board if the debtor is a listed company(4) the Minister of Finance if the debtor is Insurance Company .Article 4 further requires spousal consent to file a petition where adebtor is married. Under Article 2 (1) a petition for the declarationof bankruptcy has to satisfy two requirements; namely, the debtorhas at least two or more creditors and the debtor has failed to pay atleast one of the due and payable debts. The second mechanism introduced under Chapter III of theBankruptcy Law is the Suspension of Debt Payments (“PenundaanKewajiban Pembayaran Utang” or “PKPU”). This mechanismdoes not aim to liquidate assets but rather encourage the debtor andcreditor to restructure the debt and payment schedule. Under thismechanism Article 222 allows the debtor to request a suspension ofdebt payments provided there is an intention of achieving acompromise with creditors and unsecured creditors to restructurethe debt. These proceedings may be initiated by the debtor andrequires the agreement of a certain number of unsecured creditors.Article 224 (1) states the restructuring agreement can only takeeffect once it has been agreed by the court. Furthermore, Article236 states that once a restructuring agreement takes effect it willIndonesian Legal System 227
  • Business Lawimmediately revoke any suspension in debt payments that has beengranted previously. The Indonesian Bankruptcy Law is pro-creditor and providesfor a wide variety of creditor remedies,for instance: (1) establishesan asset distribution framework that maximizes the amount of assetsapportioned to creditors; (2) allows for a suspension of debtpayments procedure; (3) grants broad powers to the court-appointedreceiver to generate as much profit as possible on behalf of theinsolvent company; and (4) Indonesias Company Law provides fordirectors to be held personally liable for debts if the directorsmismanagement of the company resulted in the bankruptcy.Significantly, the Indonesian Bankruptcy Law does not result in adischarge of the debtors debts, but rather preserves the debtorsliability to creditors even after the adjudication. Under the Indonesian Bankruptcy Law in Article 3 (1), anynatural person or entity as prescribed by the laws of Indonesia iseligible for bankruptcy if domiciled within the country. Moreover inArticle 3, the petition for bankruptcy is filed in the District Courtthat has jurisdiction over the debtors place of domicile. Article 36 states that a petition for declaration of bankruptcyrequires the court to immediately adjudge the debtors status anddeem the debtor bankrupt if past due debts exist. The effect of adebtor being adjudicated bankrupt is that a lien is placed over thedebtors property. In the event of a judgment of bankruptcy Article11 notes that the debtor has the opportunity to appeal within 8 days,depending on whether the debtor had prior notice of the proceeding.However, such an appeal does not stay the bankruptcy. After declaring a debtor bankrupt, the judge has 14 days toestablish a deadline for all creditors to submit their claims to thecourt and to determine the time and place for a meeting of thejudge, receiver, debtor, and any creditors who desire to attend asnoted in Article 113. This meeting is called a verification meeting,and its purpose is to review all of the claims filed by creditors and228 Indonesian Legal System
  • Business Lawdetermine which are secured, preferred, or general, and whether ornot any filed claims are being disputed. At the meeting, the receivermay demand proof to substantiate a creditors claim and negotiatewith creditors while the creditors may dispute the validity of a claimor its amount. Article 56 (1) states that once a debtor is determined to bebankrupt creditors with a secured interest may foreclose on thesecured property if this action is initiated ninety days after thedeclaration. Alternatively, a secured creditor may redeem hisfinancial interest through the liquidation of the debtors estate, asinitiated by the court-appointed bankruptcy receiver. Creditors mayalso benefit by compelling the judge upon conclusion of theverification meeting to appoint a Creditors Committee. TheCreditors Committee acts to advise the receiver. However, thereceiver is compelled to provide the Creditors Committee with allinformation sought and consult with the Committee before takingcertain actions. Conversely, a debtor may attempt to protect himself byoffering an alternative plan at least eight days prior to theverification meeting that has the agreement of the general creditorsto pay all or part of the debts. Any such plan must be approved by amajority of the general creditors present at the verification meeting,as well as the District Court. Upon approval of the plan, thebankruptcy is canceled and the debtors unsecured claims aresatisfied to the extent of the agreements terms. Once a debtor is adjudicated bankrupt, the receivercommences liquidation of the debtors estate. Secured interests aregiven priority, in that all secured interests must be fully satisfiedbefore proceeds from the liquidation may be made available to theother creditors. Provided enough money was procured through theliquidation sale, remaining creditors are entitled to payment inproportion to their filed claims. Nevertheless, creditors still seekcollection of unpaid debts through mechanisms outside the legalIndonesian Legal System 229
  • Business Lawsystem, utilizing negotiation and "dubious debt collection practicesthat would not be acceptable elsewhere." If a debtor elects the suspension of payments option, thecommercial court must hold a hearing to determine whether thesuspension of payments should be extended to a total of 270 days. Ifthe 270-day period of suspension of payments is granted and thedebtor and creditors fail to agree on a rescheduling plan, thecommercial court must adjudicate the debtor as bankrupt.Conversely, if an agreement is reached on the terms of therescheduling of debt payments, and the Commercial Court acceptsthe terms of the agreement, then a decision will be issued making itbinding on all parties. Furthermore, a creditor or the state prosecutorcan request the court to confiscate a bankrupt debtors assets.Additionally, creditors can ask the court to nullify grants made by adebtor within the last twelve months if the debtor knew or shouldhave known it would be detrimental to a creditor. The new regulations also provide for debtor protection.Primarily, the new regulations allow for a 9-month suspension ofdebt payments, enabling debtors to work with a receiver toformulate a plan on how to pay creditors. A debtor who is unable topay loan repayments may receive a deferral from the court if thedebtor presents a proposal for settlement with the creditor.230 Indonesian Legal System